Right now the money you receive through PayPal is reportable, but is not visible to the IRS. The IRS feels that by sending out this form it will encourage small business owners to report all their earnings. There is no need to worry if you currently keep good records and report all your earnings. The IRS do not expect that the figure on the 1099-K will exactly match your reported earnings, but if there is a big difference in the figures, you will need to be prepared to explain the reason why.
If you are earning money currently through PayPal, or through debit or credit cards, you will need to keep a track of all of your transactions. Already there are a number of accounting software packages you can use to help you keep track of your earnings and expenses. Filling in your tax form from these packages should be fairly easy.
The 1099-K form hasn't been finalized, and this is what the current draft of the form looks like http://www.irs.gov/pub/irs-dft/f1099k--dft.pdf
PayPal, or the service provider, will record the gross amount of third party payments on the new 1099-K form. Currently there are no plans to reduce that amount by the amount of refunds, which some people are saying is an obvious problem. But you don't have to report the amount exactly on your tax form. The form will be similar in format to the current 1099-INT and 1099-DIV used by banks to report interest and dividends.
You don't need to worry for another year. The first 1099-K will be issued at the end of 2011 for taxes to be filed by April 15th 2012.
The IRS is looking for comments on this form, the email address to send comments to is: *firstname.lastname@example.org You need to put the text "Draft 2011 Form 1099-K" in the subject line. Yes the * really is part of the email address. Or you can send a letter on paper to CC:PA:LPD:PR (REG-139255-08), Room 5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.