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.
This post was featured in the Carnival of Wealth and Tax Carnival.
{ read the comments below or add one }
What if i just sell goods for an overseas factory on my account but only make a small commission of 3 percent of sales. So for example have an ebay account that sells 400k in sales a year and the factory sends me the goods on credit and I only make 1 percent of sales so I make 4k a year on the goods but all the sales go through my ebay and paypal account and than I send all the money back to them minus the 1 percent comission. How would you set this up to only get taxed on the little profit you make and not the sales you do. Thank you for any information.
sorry meant it all to be 1 percent commission and not 3 percent. just not to confuse anyone.
All you have to do is basically report the profit at tax time. Just make sure you have ample documentation of what your sales and expenses are just in case the IRS challenges your numbers.
thank you david for your help. What form would you use to report the profit at tax time with. thanks again.
Start with the standard 1040 and work your way from there. You can also use the online tools like TurboTax or H&R Block to make things much easier and likely more accurate.
I know someone who rents a booth in an antique store and sells stuff. Does she need to report that income?
I work for a lady a couple of times said she gave me $40 each time do I have to report that or is that too small to worry about
Hi all,
I ran a blog of my own that makes me about a thousand dollars this year so far and i received payment from sponsorship through paypal in a family member account. I would like to know if this income need to be reported even though the paypal account is personal. I also have other earning that i do have 1099 for but these earning haven’t reach threshold for payout yet.
Thanks in advance for the replies!
I have a sticky situation: I had income from a pair of W2 sources and multiple 1099 sources last year. Only after I put together my info for my accountant and dropped it off did I realize that I had missed a source that didn’t send me a 1099. Last year was my first with them, so I don’t know if they are often remiss in that area (lord knows I often have to chase them down for payments).
Yes, I was going off 1099s and W-2s to put together my income, not my bank statements; I realize that’s not the ideal way to do it. And, yes, I know that “They didn’t send me a 1099 and I forgot about including that income” is one of the oldest excuses in the book, but it’s the truth here. I also realize that if I’m audited, the IRS won’t care what my excuses are.
So, I decided to just forget about the oversight. My taxes have since been filed, and now I’m wondering if the IRS will eventually figure out the discrepancy. Do they cross-index all this stuff? If that company didn’t send me a 1099, is it possible they didn’t bother to report the income to the IRS? They’re a large corporation, and I made about $10K from them last year, so I realize this isn’t pocket change I’m talking about.
You’ll probably be fine. 10k on income is only about 500-1000 extra in taxes paid. Not much for the IRS to worry about.
It depends on your tax bracket B…..I’m assuming you took all the deductions you could against the 1099 income you did report. If so then the unreported $10,000 would be all additional “profit” and taxable income. It would likely be subject to Self-employment tax as well. So if you’re in the 20% income tax bracket and you have to pay SE tax of approx. 15% then your tax bill would be about $3,500 higher on your federal return and that doesn’t include any state income tax you might have had to pay.
How do I file taxes if I dont have the 1099 for about 12k
BostonGrammy has it right. I had to look it up to double-check since I never received anything from Paypal. Thanks for the link!
Won’t the fees and payments for shipping be considered expenses against the income? What happens if you add money to your Paypal account from a Money Pak card, is it considered income too?
Thanks for a great article. I started selling handmade crafts in late 2010. The money I spent to rent booth space and buy materials was a wash, so I spent what was earned and put back into my “business”. We’re talking about $700. Would I need to show this as a profit/loss sheet somehow, or since I didn’t make a profit, does it matter?
Yep. It’s simple, just fill out a Schedule C. If it comes to under $400, you don’t fill in the Schedule SE (self-employment tax stuff).
The article left out one important detail: The new regulation requires PayPal (and other such financial services) to issue a 1099-K only if the user had over 200 relevant transactions AND if the transactions totaled over $20,000. PayPal has a useful FAQ at https://cms.paypal.com/us/cgi-bin/marketingweb?cmd=_render-content&content_ID=marketing_us/IRS6050W
You have to pay taxes if you make a profit, so if you’re reselling used household goods you probably won’t owe anything. The IRS has a useful page of tips and links for “online auction sellers” at http://www.irs.gov/businesses/small/industries/article/0,,id=202939,00.html
In that case, create multiple paypal accounts and acquire only 20k per account. Did not know that paypal collected social security numbers.
Does this mean that if my earning all-together does not exceed $20.000 and my account is below the maximum 200 transaction before a 1099 is issued i don’t need to report earnings?
Wow. Very interesting post about a very relevant subject to bloggers out there. I think that is a good idea that Paypal start issuing tax-reporting forms. It will provide a greater encouragement to me to get everything organized earlier.
I thought you didn’t have to report income on something you sold if you made no profit.
For instance, 10 years ago you bought a table for $200. This year you sold it at a garage sale for $40. There was no profit–actually a loss–so you don’t have to report it. This would be true for most garage sale income.
But you bought a vase at a garage sale for $20. The experts at Antiques Roadshow told you it was worth $10,000 and you sold it for that. So now you have to report the gain of $9,980.
Am I right?
I think you’re right. But you should get a second opinion from a tax professional 😉
All income needs to be reported. Period. If you lost money – i.e. the table example, you would show the $40 as income and $40 os cost indicating on Schedule D “personal loss” (non-deductable). But yu do report it. Next fly inthe ointment – sales tax here in ILL. Talk with your tax accountant for details on that matter.
That makes no sense and it is inconsistent with the IRS page of info for online auction sellers, which states, “In a garage sale, you generally sell household items you purchased over the years and used personally. If you paid more for the items than you sell them for, the sales are not reportable.”
Will be interesting to see what PayPal and other third-party vendors do to educate their users.
What about when you sell something on eBay and accept payment through PayPal? Do I have to report that as income as well?
You always did whether paypal sends you a 1099 or not. Selling your goods is income that needs to be reported.
Interesting…I guess I’ll have to pay closer attention to the fine print next time I sell something on eBay.
It’s got nothing to do with ebay. It’s the tax code that requires you to do it, not just because the fine print on ebay says they’ll report it. If you sell something you owe taxes, even if it’s personal belongings I believe. Not that most people do, nor would the IRS particular care too much because it’s such a low number probably.
I guess I should have made a greater effort to sell my textbooks last year…
You are supposed to report that income whether you get a 1099 or not, but of course you already knew that, so you should be good there 🙂
Hmm. So question, if anyone knows the answer. I have friends that cannot buy certain gaming cards in their countries. Before now, I have had no problem having them paypal me the amount ($25 USD, covering fees) and then I buy them the card and send the digital code. I do not make profit (in fact, I sometimes lose money). How would that be affected?
Or, for instance, my MIL sending birthday money for the little one. I’m a little confused on how it all works, I think…
If you are losing money, you may be able to report that as a loss to deduct your income as long as you are treating it as a business.
Birthday money counts as gifts, and in the US, I believe the sender (not the receiver) is supposed to pay taxes if it’s over $12k or $13k a year.
Oh okay, so a birthday gift for a toddler shouldn’t be an issue.
No, I was just doing it as a favor. I don’t want them to see it as income though when I am not profiting. I guess I just won’t do it anymore to be safe though.
I don’t think you need to worry too much. If you are audited, you can just provide an explanation and everything will be set.
I thought the 12K-13K was the amount that one person could gift another person yearly – not how much a person could receive. For example, if I receive up to the amount of the limit (13K per person) and 13 people gift me the limit, then I could receive 169K in gifts without having to pay any taxes on it. The person gifting more than the limit would end up paying taxes on that. Please correct me if I am wrong.
There actually is no tax consequences for the receiver no matter the amount I believe. So even if someone were to give you $1 million dollars, you don’t have to pay taxes.
The taxes come into play for the sender when the gift is worth more than the limit to a single person.
We have a Paypal account that was set up solely to accept gifts as part of a fundraising effort for my 3 year old nephew’s upcoming bone marrow transplant. We were very successful and received many small gifts from many people that added up to a large amount of money. We provided Paypal with all kinds of proof that all of the money received into the account is gifts, but they still reported all of it to the IRS on a 1099 and say they cant retract it. How do we handle this and not pay taxes on these gifts that are helping to support my family during this hard time? Any help or guidance is appreciated!
Hi Lisa,
I’d be interested to know how this turned out for you as I’m in a very similar situation for 2014. I’ve got the payment made directly to the hospital for the entirety of donations received, but what does that mean come tax time?
thanks for the tips. i’ve made a few dollars (literally) from my blog last year and i forgot i have to report those earnings. going to be a pain in the butt.
Miranda, for tax year 2011, that would mean we do not get it with this year’s batch of 1099s but will receive one next Jan/Feb?
That is correct. We will get the PayPal 1099 starting with tax year 2011, so shouldn’t see it until next year.
Thanks Miranda. I always need to double check when it says “Tax Year XXXX” because I get confused and second guess myself. Perhaps I should not admit that on the blog I write personal finance articles for. 😉
So what happens if someone pays you back on paypal? How does paypal determine what goes on the 1099K?
I wouldn’t be surprised if EVERY transaction is recorded. After all, even if it’s money between two individuals, that technically needs to be reported.
Paypal does have a way to note what the transaction is for – for example, you can say the money is a personal gift or a fee for a service. I don’t know if they’ll exclude money that’s marked “gift” or similar on the 1099, but at least you’ll have some documentation that it’s meant as a gift.
This makes me realize I’ve been very loosey goosey with my Paypal. I always note income in my books, from whatever source, but a lot of that gets funneled into my personal paypal account alongside birthday gifts, etc.
I think it’s time to separate your business accounts from your personal ones. Otherwise, it will be a much bigger deal than necessary come audit time.
so what if I used paypal to borrow or lend money between me and my boyfriend, and we didn’t mark it as “gift” or anything?