Will PayPal send me a 1099-K for mistaken Goods & Services payment I already refunded?

The good news is you don't need to worry about paying taxes on money you didn't keep! When you refunded the payment, that effectively zeroed out the transaction from a tax perspective. PayPal is required to issue a 1099-K when a user receives more than $600 in payments marked as Goods & Services during the calendar year. Since you're well below that threshold with just the one $135 transaction that was refunded anyway, you shouldn't receive a 1099-K form. The notification about adding a Tax ID is just PayPal's automated system doing its thing - it sees any Goods & Services payment and starts the compliance process. You can safely add your Tax ID (usually your SSN) to your PayPal account if you want the notifications to stop, or you can ignore them if you don't plan to receive more payments like this. If by some strange chance PayPal did issue you a 1099-K (which would be incorrect), you would simply report it on your tax return and then report an offsetting refund so your net taxable income from this would still be zero.

I dealt with a similar PayPal mixup last year and learned a lot about this whole reporting mess. After hours of frustration trying to figure out what to do, I finally found https://taxr.ai which actually saved me a TON of stress. They analyzed my PayPal transaction history and gave me a clear breakdown of what was actually reportable income vs. what wasn't. In your case, they'd confirm that refunded G&S payments don't count toward the $600 threshold, and their system would generate the proper documentation in case you ever get questioned. They also explained to me how PayPal's reporting works differently than actual tax liability. I'm not very tax-savvy but their explanations were super clear and the documentation they provided gave me peace of mind.

Just wanted to follow up - I actually tried taxr.ai after asking about it here. It was surprisingly helpful! I uploaded screenshots of my PayPal transactions (including several Friend & Family payments I was confused about), and they provided a detailed report explaining exactly what I needed to report and what I didn't. They confirmed that my refunded payment similar to yours doesn't count toward the $600 threshold for 1099-K reporting. What I really liked was they gave me proper documentation explaining WHY these transactions aren't taxable, with references to specific IRS rules. Now I have something concrete to refer to when filing rather than just Reddit advice (no offense to anyone here!). Definitely feeling more confident about tax season now.

For what it's worth, I've had problems reaching PayPal support about tax issues like this. They kept redirecting me to their help articles without actually addressing my specific situation. After wasting hours trying to get through to someone who could help, I found https://claimyr.com (demo at https://youtu.be/_kiP6q8DX5c) which got me connected to an actual PayPal rep in about 12 minutes. The PayPal rep confirmed that refunded transactions don't count toward your reportable income total and helped me remove some incorrect tax flags on my account. Might be worth trying if you keep getting those annoying tax ID notifications despite having refunded the payment. Sometimes you just need to talk to an actual human to get these issues fixed properly.

Ok I need to eat my words from my previous comment. I was VERY skeptical about Claimyr but I was desperate to reach someone at PayPal about my 1099-K issue (slightly different from OP's but still related to incorrect payment flagging). I'd been on hold three separate times with PayPal for 25+ minutes each before giving up. Decided to give Claimyr a shot as a last resort and no joke, they had me talking to an actual PayPal tax specialist in about 15 minutes. The agent was able to confirm that my refunded transactions wouldn't trigger a 1099-K and even put a note on my account about the situation. The service basically called PayPal, navigated all the stupid phone menus, waited on hold, and then called me once they reached a human. I was genuinely surprised it worked so well. Sorry for the skepticism before!

Everyone's giving you great advice about the tax implications, but here's a tip to avoid this in the future: explicitly tell people to use Friends & Family when sending you money. My friend group started putting "F&F ONLY!!!" in our venmo/paypal requests because we got burned by this too. Also, small side note, but the reporting threshold for 1099-K changed recently. It was supposed to drop to $600 last year but got delayed. I think it's officially $600 for 2025 tax filings, so just be aware if you're receiving more payments through PayPal in the future.

I work in accounting (not a CPA) and deal with this constantly with clients. Here's the simple version: PayPal reports to the IRS based on GROSS payments received through G&S, not your net after refunds. But YOU report based on your actual income. So PayPal might flag your account because their system detected a G&S transaction, but since you refunded it and it was below the threshold anyway, it's a non-issue for your actual taxes. Just keep records of the refund in case there's ever a question. Don't stress about this at all - it's a classic PayPal overreaction to make sure they comply with IRS rules. You're good!

Just to add another perspective as someone who went through a similar panic with PayPal last year - you're absolutely overthinking this! I had the exact same situation where a friend accidentally sent me money as G&S instead of F&F, and I immediately refunded it after seeing those scary tax notifications. The key thing to remember is that PayPal's automated system is designed to be overly cautious. It sees ANY G&S transaction and starts the tax compliance process, even if it's just $1. But the actual IRS rules are based on your net income from business activities, not random one-off mistakes that you immediately corrected. I ended up just ignoring the PayPal notifications since I knew I wouldn't be receiving business payments in the future. The notifications eventually stopped appearing after a few months. Never got a 1099-K (as expected), never had to report anything on my taxes, and never heard from the IRS about it. Your situation is even more straightforward since you're well below the $600 threshold AND you refunded the payment. You're definitely in the clear here!

I'm dealing with a very similar situation right now! My sister accidentally sent me $200 through PayPal as Goods & Services instead of Friends & Family for splitting a dinner bill. I panicked when I saw those tax notifications and immediately refunded it, but I've been getting the same annoying messages about adding a Tax ID. Reading through all these responses is super helpful - it sounds like I'm worrying about nothing since I refunded the payment and it's way below the $600 threshold anyway. I was especially stressed because I'm self-employed and already have to deal with enough tax complications without adding PayPal confusion to the mix. Thanks everyone for the detailed explanations! It's reassuring to know that PayPal's automated system is just being overly cautious and that the actual tax implications are much simpler than their scary notifications make it seem.

I went through almost the exact same thing a few months ago! My roommate sent me rent money as Goods & Services by mistake, and I had the same panic reaction when PayPal started asking for tax info. I immediately refunded it and switched to Venmo for future transactions. What really helped me understand the situation was realizing that PayPal's system is just following legal requirements - they HAVE to ask for tax information once any G&S transaction occurs, even if it's clearly a mistake. But the actual tax implications are based on IRS rules, not PayPal's internal compliance processes. Since you refunded the payment and you're way below the $600 threshold, you have absolutely nothing to worry about tax-wise. I ended up just ignoring the PayPal notifications (they eventually stopped), and when tax season came around, there was nothing to report. No 1099-K, no complications, no issues with the IRS. The key lesson I learned was to always double-check the payment type before sending or receiving money on PayPal. Now I explicitly tell people "Friends & Family only" when they owe me money to avoid this whole headache in the future!