Tax season is in full swing. For 2010 taxes, we have a couple extra days to get things sorted — until April 18, 2011. These days, with the Internet providing the possibility of side business income, many wonder what income needs to be reported. Many think that if no 1099 is issued, they don’t have to report the income. This is not, in fact, true. We are supposed to report all income, no matter how small.
What If I Make Less than $400?
Many people think that if they make less than $400, they don’t have to report the income on their income tax return. Sadly, this is incorrect. That $400 threshold actually refers to whether or not you have to pay self-employment tax. The IRS makes it quite clear that those with net earnings of $400 or more must fill out Schedule SE and pay self-employment tax. However, even if you are not required to pay self-employment tax, you are still required to report your income from a home business or other sources, even if it is less than $400 and with or without a 1099. While it would be hard for the IRS to enforce this, you could be caught if you happen to be chosen for an audit.
PayPal and Other Third-Party Payment Providers to Begin Issuing 1099s
Many online entrepreneurs fudge their income numbers a bit, since what they receive from PayPal and similar payment processors may come in small amounts and PayPal doesn’t have to report what it sends through. Well, it didn’t have to report. Starting with this year (tax year 2011), PayPal and companies that provide similar services will be required to submit a Form 1099-K to the government. You will also receive a copy. This form reports the income your received via PayPal. So, if you have been under-reporting income received with the help of PayPal, it’s probably a good idea to stop that practice.
Other Income that Should Be Reported
Realize that just about every income out there is supposed to be reported to the IRS. This includes gambling winnings, royalties, tips, and other winnings. Property windfalls (remember when Oprah gave everyone in her audience a car?) also count as income, which means that you have to count the fair market value as income. A real bummer is that you have to count debt forgiveness as income. So, if your mortgage lender writes off $10,000 of your home loan in a modification or during a short sale, you have to count that as income — even though you didn’t get the cash. You usually need to pay income taxes on savings deposit interest earned, dividend earnings and other investment gains too, so don’t forget that.
An interesting exception to what you have to count as income includes gifts that are given to you. If you receive a large cash gift, you are not on the hook for the taxes. Givers are required to pay the gift tax. You don’t have to pay income taxes on a gift. However, if the gift appreciates in value (such as a gift of stock), you might have to pay taxes on the increase.
In the end, you have to report any income you receive. You can offset your income with the help of deductions and adjustments, but it still needs to be reported.
I am not a tax professional, so you should speak with one before you make tax planning decisions.