Accidentally sent gift money to business account

[MysteryCorgi]

After the recent changes that prevent business accounts from receiving friends & family transactions, I had to make a new paypal account for personal transactions. I understand why Paypal has made this change but it still kind of stings as someone who followed the rules carefully before. I'm also frustrated that the change caught me by surprise, despite following updates it slipped past my notice. I wish Paypal had made it more apparent in the months leading up to the shift. But that's besides the point.

A friend who regularly sends money forgot about the change and sent the money to my business account. When I looked at the transaction to see if I could refund it so the friend could send it back to the correct account, it looked like I was going to be charged fees that I couldn't afford, so I kept the transaction as-is and made my peace with the transaction fees.

Looking ahead to tax season, is there a way to indicate that it was incorrectly labelled as income (rather than a gift.) Because this happened twice (a different friend unexpectedly sent a large gift at the same time), I'm worried about it skewing my reported income once I get the 1099-K. Is there some way to properly mark it in paypal ahead of time or will I need to file corrections after I get the 1099-K at the end of the year?

I'm not sure what the process is, if someone can point me in the right direction I'd be grateful.

[sharpiemarker]

@MysteryCorgi 

You’ll have to talk to a tax professional about reconciling that. 

[MysteryCorgi]

Ahh, thought that might be the case. Appreciated. 

[MysteryCorgi · Accepted solution]

I've found the solution, so I am responding to my old post in case it'll help people in the future.

According to this page on Keepertax:

The IRS gives you a playbook for dealing with "extra" income on your 1099-K, but it's a little convoluted. You'll use Form Schedule 1. This form is used to report income from miscellaneous sources — as well as income adjustments, which are subtracted from your income.

 Alt text: The top page of an empty 2022 Schedule 1 (Form 1040)

Here's what you'll do:

• Report the personal payment on Part 1 of your Schedule 1. You'll be using line 8z, for "Other Income." Put the type, put in "Form 1099-K Received in Error"
• Offset it on Part II of your Schedule 1. This part of the form deals with "Adjustments to Income." You'll use Line 24z, for "Other Adjustments." Again, put in "Form 1099-K Received in Error" for the type

This basically means you add the income on one part of the form, then immediately subtract it on another part.

Here's an example. Pretend your roommate Venmoed you $700 for their half of the rent, and this got captured on your 1099-K by mistake. Here's what you'll put line 8z of your Schedule 1:

Alt text: 2022 Schedule 1 (Form 1040) with line 8z circled in magenta, showing the "$700" income that was mistakenly included in the 1099-K to illustrate the article's example.

And here's what you put in line 24z:

Alt Text: 2022 Schedule 1 (Form 1040) with line 24z circled in magenta, showing the adjustment to remove the $700 amount that was mistakenly included in a 1099-K as earned income for the article's example.

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I only found this answer thanks to not getting a 1099-K this year (2023) for 2022's taxes, as has been common due to recent events.

I hope this helps.