PayPal & Income Tax Question

[GehrigFan]

I know PayPal has a rule about sending tax forms when you make $20K or more, but how do they define that $20K? Do they only count eBay transactions? Do they count Friends and Family deposits or deposits of funds from your bank or Coinstar as "income?" Is there a place on their site to see exactly where you stand for the year so you know?

Thanks!
Mark

[pawpawdiv9]

Basically from what i read, its a mess. That we need 2 separate accounts for personal & business.

I did find some info regarding this tho:
1. OK. The $20,000 is revenue NOT profit. Pay-pal will report you made sales over $20,000 or 200 transactions. They have no idea if you made a profit. You will report that yourself on a Schedule C if you made over $400 in profit.

2. Your online store would be considered income from self employment. You are required to file a federal income tax return if your gross income from self employment is $400 or more. If your net income is $400 or more, at a minimum you will owe self employment tax. Depending on how much you make and the state in which you reside, you may also owe federal and/or state income tax. You are responsible for keeping your own records of income and expenses.

If you have other income which requires you to file a federal income tax return, you must report all income from self employment (even that less than $400) on your return.




I also found this very interesting as well:
Re: Paypal Tax Reporting Policy
GazCooperOnline's advice above is right on....Don't mess with the IRS....they need money to keep the govt running and their job is to extract every bit they can plus penalties and interest and in some cases throw you in jail to make you an example to others.

You are either in business or you are playing at it. If you have never read the IRS's publication for businesses, I strongly suggest you do so -

Publication 334 (2010), Tax Guide for Small Business

One thing you will learn is that you should never "co-mingle" personal and business funds, ever. Whether you think you can prove it was personal funds is of no regards to an IRS agent who needs to meet his or her quota for the month.

Debate the issue of what PayPal is or isn't all day but to the IRS and the US Govt. they are a financial business. I view the requirement of submitting an SSN or TIN for accounts having less than $20K in transactions as a pre-emptive CYA action on the part of Paypal.

If your business ultimately reaches that threshold and they are unable to obtain your SSN or TIN then they become subject to heavy fines and penalties and I am talking in the tens of thousands of dollars or more.

ALL financial institutions, car dealers, coin dealers, and other businesses are required to submit a special form to the government if someone deposits $10,000 or more in cash. Guess what, some banks are so fearful of the fines they might have to pay that they even file the form for $3,000. I know as I had to give them my driver's license to deposit $3K of my father's money into my father's bank account 5 years ago. NOT my account, his. So some banks have voluntarily lowered the limit from $10K to $3K (in my case) just to cover their back sides. Can't blame them if you do the research and see the $$$ of fines they are subject to.

I am neither an accountant or attorney, however, I did study accounting 30 years ago and have had first hand business experience dealing with numerous banks over the years.

In the past 10 years my small business has experienced over $1 million in fraudulent orders. Two times I had to shut down business acounts that were used for wire transfers due to fraudulent withdrawals.

It was interesting to note in the last instance the bank rep told me that they had at least one incident a day of someone trying to use stolen ID to get money fraudulently from the bank.

I know this post went a bit off subject but I keep reading about all the PayPal horror stories and then this post about why they are asking for some ID and I feel every needs to know that there is another side to the story.

My suggestion for those who have a business and who sell personal items on ebay is to set up a personal PP account in your spouse or partner's name for any non-business buying and selling and have it tied to a personal bank account with a very small balance.

In regards to your business PP account, don't do non-business ebay transactions or have your brother, sister, mother, father or anyone send you money if you need it into this account as it should not be co-mingled into your business funds.

Gaz Cooper gave some excellent examples in his post, believe me there are thousands more horror stories and you don't want to be one of them.

[GehrigFan]

Thanks pawpaw. I'm still trying to figure out primarily:

1) what they include as revenue for that $20K. If I deposit $1K from my bank account intpo PayPal to buy something, do they just include that $1K deposit as "revenue"?

2) If they have a place online to figure out where you stand in regards to the $20K limit for the year?

Thanks!
Mark

[ATP]

I am fairly certain you need to have 20k in revenue AND 200 plus transactions. Funding of your own money from your bank account to paypal do not count, they are not revenue. There should be a report, under the history section, reports, called annual financial summary, which would give you a total. Hope this helps.
Best,
Jeff

[Runscott]

I would just always keep in mind that the IRS has the Paypal information to use if they decide to audit you. Then you might have to explain how the Paypal income matches up against the income you reported.

I'm curious if anyone has had to explain Paypal information to the IRS during an audit. Especially curious about how they view the 'Paypal gift' thing, which is why I avoid it completely.

[GregMitch34]

And then the question that may apply to more: If you do NOT have an online card site or eBay store and are not really in business; and just buy and sell a handful of cards each month (here, at ebay, or auctions) for your collection...certainly under 200 and 20,000 for paypal...how do taxes work for this lower-level approach?

[pawpawdiv9]

i assume its just like playing the lottery. Does anyone report their scratch-offs?

[ibuysportsephemera]

I am fairly certain you need to have 20k in revenue AND 200 plus transactions.



This is correct.

Jeff

[drcy]

I use my PayPal $$ in my taxes. I go through and itemize what counts and what doesn't as income. You report and individualize what is income and what is not. Obviously, I don't report on my annual taxes a transfer to PayPal from my own bank as profit.

Duly note that I have a state business license and already report quarterly for state sales taxes, so that itemizing is largely already done anyway when Federal taxes role around.

No, rarely would all of someone's money deposits in one's personal PayPal count as income. As I said, many people regularly transfer their own bank funds into PayPal. The IRS would understand that.

Also note that PayPal does specifically identify direct bank account transfers as its own thing in the listings-- after all, you do the transfer via PayPal on the PayPal site--, so might not even count that towards the $20,000 anyway. My bet is they don't count personal bank transfers towards the $20,000.

[GehrigFan]

Thanks all. I was finally able to find a place for reports, and although a pain (you have to do each month at a time and manually add), there is a place where they add up each month's "revenue" separately. I still don't see where they are putting Friends and Family payments, but deposits are counted separately.

[drcy]

I do mine by hand. Itemize on a print out and do the own calculations on a calculator.

[GregMitch34]

Let's say you by a card for $150 and sell it the next week for $200. Does that mean your "income" was $200? Or $50? Or separately you'd list $50 in a profit line? Or $150 as an "expense"? And would this apply to casual dealing, not a "business"?

[irishdenny]

Let's say you by a card for $150 and sell it the next week for $200. Does that mean your "income" was $200? Or $50? Or separately you'd list $50 in a profit line? Or $150 as an "expense"? And would this apply to casual dealing, not a "business"?

My 2 Cents... If You are a Collector, than this would be part of your "Hobby" Report on Your 1040A. It's no different than reporting Art, Coins & Stamps.

If You have a "Business", than You'll need to Separate Your "Hobby" from Your "Business" transactions. Over the years I have found that it's Only difficult if I make it So!

I just report it All... As it is!

[Eric72]

Let's say you by a card for $150 and sell it the next week for $200. Does that mean your "income" was $200? Or $50? Or separately you'd list $50 in a profit line? Or $150 as an "expense"? And would this apply to casual dealing, not a "business"?

Along with Denny Walsh's comment, please allow me to add this:

In the scenario mentioned above, the $200 is gross revenue and the $150 is an expense. Both of these numbers should be reported (and source documents for both transactions would be very helpful.)

The net income of $50 will show on the line item for which the IRS Form instructs you to deduct one particular line from another particular line. So, all three numbers would be reported.

Hope this helps.

Best regards

Eric

[savedfrommyspokes]

Let's say you by a card for $150 and sell it the next week for $200. Does that mean your "income" was $200? Or $50? Or separately you'd list $50 in a profit line? Or $150 as an "expense"? And would this apply to casual dealing, not a "business"?

Since I have been buying and selling cards, the best investment I have ever made was to secure the services of an accountant who's knowledgeable and focused on self employed individuals. All of my questions I had concerning how to report my activities, such as what can be considered expenses, deductions, etc, were answered very easily by my accountant. My cost for his services (answer my questions, help me to establish a system I maintain to account for my transactions, and prepare my taxes) are about $300/year. Best money I spend all year long.