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Approx $15k made through PayPal last year. Noob tax questions

Discussion in 'Business & Tax Advice' started by mollah, Jan 5, 2010.

  1. mollah

    mollah Power Member

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    Hey,

    I live in the US. I started a little side project near the end of last year and made around $15k. I received all payments through PayPal.

    How do I do my taxes on this? What forms do I need, etc?

    I know I can subtract out the PayPal fees and also subtract out the money that I paid for help (business expenses, outsourcing, etc.)

    I've always had corporate jobs where I get a tax statement and everything is all easy cuz taxes are taken out, etc. I've never done the self-employment thing before.

    Also, if I continue this this year, can I get Cliffs Notes on how to pay estimated self employment taxes?

    Please note I'm not looking for answers like "lol, who cares, it's PayPal, just don't declare it."

    edit - I forgot to mention, it's all in my personal name. I had no idea if I was going to make any money or not so I didn't want to go to the trouble of starting a business and spending that money only to end up not making any money.

    Thanks.
     
    Last edited: Jan 5, 2010
  2. trooper

    trooper Regular Member

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  3. mollah

    mollah Power Member

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    i was hoping for a little more than that :)
     
  4. thesickest

    thesickest Newbie

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    When you file your personal tax return. Your looking at paying in about 15% of that. Put it under 'Other' income. Gross after expenses.

    Under a Corporation, however, your vehicle, gas, restaurants, and motels can be deducted. Equipment purchases/sales. Depreciation on corporate owned vehicles.
    The list goes on forever just about.

    I'm not a tax attorney and this is for entertainment purposes only bla bla if you screw up your taxes dont sue me. This is BHW. And if you didn't make any transactions to your bank account above $5000 at a single time, what big brother doesn't track big brother isn't aware of. Unless it is from a company and filed by them through the government 1099 for example Max Bounty, Hydra, Any big affiliate advertiser. They do their taxes. If it's items sold on ebay through paypal, it's pretty much the same as a 'yard sale' your supposed to report it, who does? unless the items being sold were titled and changed names or other such exceptions. Your fine.

    =)
     
  5. Grandslam

    Grandslam Senior Member

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    Disclaimer: I am not a certified public accountant or tax or legal professional of any kind. This does not serve as tax or legal advice.

    An internet forum is not the place to ask this type of question. You need to consult a CPA and see what expenses can be deducted, how to file properly, etc. Just have them do everything for you. Why waste your precious time trying to save a few bucks when that same amount of time you wasted on trying to file properly could've been used to make thosands more!

    "There's no point in screwing it up yourself and getting a welcome letter from our friends at the IRS!"

    ~ Grand "Van man" Slam
     
    Last edited: Jan 6, 2010
  6. davidson

    davidson Registered Member

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    I am a California Registered Tax Preparer and my disclaimer is that I don't know your personal situation, so I cannot give you specifics on your specific situation without seeing your records.

    However, do NOT just add it as additional income. That advice is likely to get you audited. The IRS likes to see specifics about income added to the tax return. If you had lottery winnings, for example, you could list it under additional income with the notation that it was lottery winnings. You cannot add an item to additional income and list it as small business.

    Instead, you will file a Schedule C with your Form 1040. On the Schedule C, you will list all of your income. In another section, you will have the opportunity to list by category each of your expenses. The net amount (income less expenses) will carry over to your Form 1040 as self-employed income.

    You will also be liable for self-employment tax, which is the employers share of social security and medicare taxes. You will need to fill out Schedule SE which will allow you to calculate the amount of the tax. You declare the entire amount of SE tax on the back page of the Form 1040 but you also get to take an adjustment on the first page of the Form 1040 that equals half of the total amount.

    Don't forget that step. It's important. This is money that will eventually affect your retirement / social security benefits. And you can't claim these deductions if you list list your self-employed income as "additional income."

    The bottom line is you need to do one of two things.

    1.) Consult with a tax professional. Once you see how the tax return is done, you will probably be able to do it yourself. If you choose, however, you can keep having someone do it for you. (The tax return preparation fees are deductible as a business expense.)

    2.) Read the IRS publications from the website trooper referred you to. It's tedious and you may have to re-read them to gain a clear understanding of what you have to do, but be patient and work hard to try to understand it. Once you do, you'll never have to rely on a tax professional again - except in extreme cases.

    You can save yourself a lot of money if you just take time to learn this stuff.

    I would also steer clear from asking tax advice on a forum - unless its a forum of tax professionals - because your average person doesn't understand the law and is probably doing it wrong themselves. Unfortunately, when you take bad advice from someone, you are usually the one that gets screwed.

    My advice ... go see a tax professional.

    Good luck.
     
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  7. davidson

    davidson Registered Member

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    By the way .... I've been telling anyone on this forum who will listen to me ....

    PayPal is cooperating with the IRS on reporting payments. In the next year or so, we will all be getting 1099s (or something similar) that shows our earnings through these payment systems.

    Anyone who has been getting by with not reporting PayPal because it's just like a "yard sale ... who cares!" is going to be in for a rude awakening.
     
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  8. cashnone

    cashnone BANNED BANNED

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    if you don't get a 1099 then dont pay. IRS wont know, they have a hard time as it is trying to catch tax fraud from people who do get a 1099.


    but i recommend always pay your taxes... :)
     
  9. davidson

    davidson Registered Member

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    Sorry, Cashnone ...

    Tax code states that you must pay income tax on all income whether it is reported by a third party or not. Advising someone not to pay - even if they don't get a 1099 - is irresponsible. That is considered income tax evasion and a lot of people go to jail for that. The IRS is focusing resources on online activity and its going to get harder and harder to just not report income.

    Just a warning ... you may be OK not reporting income this year or next, but soon you won't be able to do that.
     
  10. johnqpublic

    johnqpublic Newbie

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    Yeah, I've read this around the net as well. Sorry aint gonna happen... Why you ask, because there are to many variables with PP money to just send you a 1099.

    Not all money in your PP account is income. ie You transferred funds from your bank.. Who's to say those funds aren't already taxed with a W2 from your job. There's prob more then 20 scenarios I could think of why they wont be able to just 1099 you. Sure they(IRS) wants at the PP $ cause they see the potential, oh and there greedy. However they will have to figure out another way to prove it was ALL/PART income. (ie Schedule PP) are some sh1t....

    It's a 'bank account' and last time I checked you don't get '1099ed' for your bank accounts, yeah you may get reported for deposits over 2k-5k but not a 1099 for ALL your loot... nope sry...

    Beside if they do it, net history tells us we will move to other online banks etc... so no biggie....
    -------------------------------------------------------------------


    As far as reporting it, I know a friend that hasn't reported it in years with no worries.... your call..... they are not looking at the 15k folks they are looking at the 100k+ ppl.

    and of course Dudley do rite cpa's will tell you need to file a Schedule C but that just cause they cant see out of there window-less box (skill set). They don't tell you there's about a dozens ways to file your taxes and all are legal...

    Here's 1
    So you made 15k and 1k from grass cutting/baby sitting etc. (cash bus. no way to verify) for a total of 16k (Sweet spot for EIC this year) on a Schedule C/SE. Then you add on a few of dependents. (This year they allow you 3, 2009) Take that and including the Stim-u-less Schedule M form (+400) will get you 5k+ on a refund this year. My friend will have his refund direct deposited by the 20th of jan.. So he paid his SS that he will prob die before he receives and starts the new year with 5K in non taxable income.... any questions???

    Trust me the IRS is just happy you filed. They will not bother you...

    I suggest you get H&R Block at Home and learn it... It's not hard... My friend DL it off the torrents before new years... :chairshot

    You can find it on isohunt etc pretty easy... (torrents)

    Wow I was starting to think this was DP for a second...

    BHW!!!!!!!
     
    Last edited: Jan 10, 2010
  11. mollah

    mollah Power Member

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    Thanks.

    I'll probably go see a pro. Obviously I'm not gonna take tax advice as being concrete from people on the internet... especially on a blackhat site where half the thread on the front page are "how do I hide my bank account" type of things :D

    I was just trying to get an overview of what I'm in for.
     
  12. davidson

    davidson Registered Member

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    Johnqpublic -

    Well, you are certainly entitled to your opinion. But let me give you a little background on me and why you may not want to shrug me off so quickly.

    I've met with the Commissioner of the IRS three times in the last year. I've met with the National Taxpayer Advocate three times in the last year. In September, I met with the commissioners of the Wage and Investment and Small Business / Self-Employed divisions of the IRS. In December I testified before the Tax Reform Subcommittee of the President's Economic Recovery Advisory Board. Over the last three years I have been heavily involved in recommending policy changes to the IRS. The IRS is currently implementing a new system to regulate the tax preparation industry. The proposed regulation includes several key recommendations outlined in a report I wrote and hand-delivered to the Commissioner in September.

    Just letting you know that I have a little credibility behind my statements. I'm not blowing smoke or sounding off with my opinion. It's based on observations and dealings I've had with people at the executive level in the IRS.

    You may say it's not going to happen, but I will continue to argue that it will. I've seen the trend and I've talked to the people who are making it happen.

    You are correct that not all of the money in a PayPal account can be attributed to taxable income. Your premise on the IRS proving the matter, however, is simply wrong. The IRS has it in its power to require the taxpayer prove the transactions do NOT constitute income, in other words, shift the burden of proof.

    In much the same way, when you sell stock, your broker is required to report the transaction to the IRS. At the end of the year, you receive a 1099 with the "profit" from all your sales. Of course, the IRS assumes a zero cost basis, in which case you would have to pay tax on the amount shown on the 1099. To avoid that, the taxpayer must show - or prove - the basis. That requires completing forms and keeping records that indicate the costs basis. If the taxpayer can show a smaller profit, they pay less tax accordingly.

    All the IRS has to do it require PayPal to report transaction in your account in the same way and force you to prove which transactions do not qualify as income.

    By the way, they are also working with banks to report transactions from merchant accounts for the same reason.

    The IRS is extremely motivated to reduce the Tax Gap. The main source of lost revenues that make up this figure is not from wage and investment earners whose income is largely reported. It's from small business / self-employed individuals (and more specifically those in high cash transaction businesses) whose income is hard to track.

    The IRS rightly assumes it can recover lost revenue by identifying transactions that could qualify as income but are currently not reported. Analysts at the IRS are not stupid. The online economy is huge. They know it. They are just trying to figure out how to control it.

    Your assumption is based on the system currently in place. For example, banks only report transactions over certain amounts. That's the current system, but it may not be the system in place in a few years. Your assumption does not take into account that new regulations can and will be created to deal with the electronic economy.

    I had heard the rumors in DC for years. It wasn't until last year that I head that National Taxpayer Advocate talk about efforts within the IRS to tap into the economy of online communities like Second Life that I realized that these people know what they are doing and they're going to get it under control. It's my belief that it's going to happen sooner than later.

    Congress and the IRS takes steps all the time to close loopholes and shut down evasive tax strategies. They see the online economy as just another abusive system that needs to be regulated. I know, based on the conversations I've had in the last year, that it's happening in the IRS.

    You can disagree with me all you want. Don't worry, I don't take it personally. But just don't be surprised when it happens.
     
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