Tax Issues with Online Earnings!!

@cbantly (236)
United States
June 29, 2009 8:17pm CST
I will be the first to admit that I have never claimed any of my online earnings up to this point, but they really haven't amounted to much prior to this year. A friend of mine just called me for advice, and said that he was audited by the IRS. Because he had to show bank statements, the agent found money transfers from PayPal and is now charging him with tax evasion!!! Does anybody claim their online earnings on their taxes? At what point? What are your thoughts?
2 people like this
7 responses
@khayshenz (1387)
• United States
30 Jun 09
I think the general rule of thumb is $200.00 a month. So if your "earnings" add up to about $200.00, then you need to report yourself as "self-employed" or something along those lines. If he makes a lot online - then yes, he needs to claim those. I'm not much of a tax person - but I just read the $200 claim on one of those "online jobs." Yeahhhh - I tried the ACME Search thing, and it didn't pan out for me. Anyways, yeap. I hope your friend will be ok!
2 people like this
@cbantly (236)
• United States
30 Jun 09
I think that if your earnings came from one place...it would be a lot less than the $200 a month you referenced! I know $600 a year results in a 1099 from the source.
2 people like this
@reinydawn (11651)
• United States
30 Jun 09
Good Morning khayshenz! Long time no see!! Read my post in here, it will explain a lot.
@khayshenz (1387)
• United States
30 Jun 09
Ahhh - good morning Ms. Reinydawn. I will be headin' out to work in a couple of minutes but I'll make sure to check it out later. In your blog?
1 person likes this
@gloamglozer (1285)
• Australia
30 Jun 09
I've only ever transferred my money from paypal to my bank account once so I don't think I'd have this problem. Now I just keep it in my paypal account and use it to but things online. I think should not charge tax for earnings online since they not as substantial as such things as regular income though.
2 people like this
@cbantly (236)
• United States
30 Jun 09
I leave it in my paypal account as well, but I also have the papal debit card. I can make offline purchases and never have it pass through my bank account! I'm sure many people use paypal for just such reasons!
2 people like this
@reinydawn (11651)
• United States
30 Jun 09
Paypal is a bank account as far as the IRS is concerned. They can check the transaction history for that also. If you are audited and you withhold that information it might be considered fraud... Read my post to see more info.
@smartie0317 (1612)
• United States
30 Jun 09
I've been told, that as long as your earnings, even from an offline source, from a single source don't equal 600 dollars or more you don't have to claim them. I.e. if you made 100 from myLot, 100 from another, 100 from another, 200 from some site, 300 offline. You have more than 600, but not 600 from a single source and no need to claim it. To my knowledge once you reach 600, offline and online employers give this tax sheet, but I forget the name and you fill it out.
2 people like this
@cbantly (236)
• United States
30 Jun 09
After $600 a 1099 is issued. I'm not sure if he made more from each source, or if he didn't claim it at all. Apparently you are supposed to claim the income, but the sources are not required by law to report you if it is under $600. It's enough to scare you a little!
2 people like this
@reinydawn (11651)
• United States
30 Jun 09
cbantly, you're very close to the truth here. Read my post for more information.
@reinydawn (11651)
• United States
30 Jun 09
This is a wonderful discussion. I am a CPA and know first-hand that many people do not understand the implications of not reporting income/expenses to the IRS. The NUMBER ONE misconception is that if you don't receive a 1099 for the money you received, you don't have to report it. Here's the deal - ANY money you earn is taxable income. If you are paid more than $600 from any one source, they are required to report it to the IRS. If you make more than $1 from any source, you are required to report it to the IRS. Just because someone isn't required to report what they paid you doesn't mean you don't have to report it as earnings. Your friend is finding this out the hard way. It's two different situations. Here's an example... Say you're a house painter and you only charge people $595. No one has to issue you a 1099, but after doing one house a week you've made over $30,000 for the year. That's taxable income. For Internet terms, you're on 30 different paying websites and you make $500 from each one during the year. That's $15,000 of taxable income. When you sign your tax return, you are attesting to the fact that you have reported any and all income that you recieved. If you have omitted something, the IRS can charge you with fraud - penalties, interest and possibly jail sentence. And the IRS can go back to the beginning of time if they suspect fraud - not just the "7 years" most people think. When you are audited, the IRS will require you to provide them with all your bank statements for a certain period of time. Your PayPal account is a bank account as far as the IRS is concerned and they will usually ask for that also. They can ask for your e-bay history or whatever they want to. They are going to count any moneies you received as income, you have to prove otherwise. If they find any income that you didn't report on your tax return, you're in trouble. But, here's something you need to remember. This income you have, normally has expenses related to it. If you didn't have internet access you couldn't make money online. If you didn't have a computer, you couldn't make money online. If you have a business paypal account, there are fees involved. You may even be able to write off some of your house expenses. Basically, you really should talk to a reputable tax person. Quite a few of the tax prep chains do not know the rules and will tell you that this income is a gimmie - you don't have to pay taxes on it. They're wrong, talk to a professional. It may cost you a little more money (another expense that you can deduct) but it's going to save you in the long run if you're ever audited. [i]CIRCULAR 230 NOTICE: The IRS has issued Circular 230 which is intended to stop abusive tax shelters. Its reach is much broader. The new law requires that the following be added to written statements concerning Federal tax issues: "Any statements contained herein or in attachments hereto relating to a Federal tax issue are not intended or written to be used, by the recipient or any other taxpayer for the purpose of avoiding penalties under Federal tax law and were not written to support the promotion or any marketing of the transaction or matters discussed herein."[/i]
1 person likes this
• Canada
30 Jun 09
Thanks so much for posting this succinct information, reinydawn. I've worked as an independent contractor, online, since 1999. As soon as I became self-employed, I hired an accountant to handle my taxes. I've always reported any earnings, no matter the amount, and I rely on him to make sure that I benefit from the expenses and deductions to which I'm entitled. I feel much more confident doing things this way. Granted, I'm personally subject to Canadian tax law, but I appreciate your information from the perspective of the IRS. While there will always be some differences, the premise you outline is certainly the same. I've also been in a position to engage other ICs for various contract projects and I've had a very hard time with some of them not understanding that earning online does not constitute "free money." Something about earning in the virtual world seems to make the money less real to some.
1 person likes this
• United States
30 Jun 09
Thank you so much for the information. I have a lot of questions about taxes. do you have a website that explains these things as well as you have here? Most is a bunch of verbage that doesn't make a lot of sense or does not apply to me...
1 person likes this
@irishidid (8119)
• United States
30 Jun 09
Good information Reiny. My own experience being self employed is that when you make over $1,000 a month you have to report it quarterly and pay estimated tax. Correct me if I'm wrong on that. In my case I didn't make that much so I only had to report it at tax time. In my situation I get EIC and what taxes I owed were taken from that and I received the remaining back as my refund. I even spoke to the IRS to make sure this was all right and they said yes. Personally, I don't care if you make squat, you need to report it. There's much more at stake such as medicare, social security, and your children being able to collect if something happens to you. The benefits largely outweigh getting one over on the government.
1 person likes this
• United States
30 Jun 09
Technically I suppose we should. It would be the honest thing to do. I have not made anything yet, so it hasn't mattered. This is the first month that I will make payout. I think that I will begin to keep a record though so that I can report it. Better safe than sorry!!!
1 person likes this
@reinydawn (11651)
• United States
30 Jun 09
Great job!!! See my comment for some good tips.
@reinydawn (11651)
• United States
1 Jul 09
The IRS actually has a lot of useful information. You can start here - http://www.irs.gov/businesses/small/index.html It's really got just about everything you would need. I don't really have a "tax help" web site, but the IRS site is a great resource.
@cbantly (236)
• United States
1 Jul 09
It's always better to be safe than sorry, especially when dealing with the IRS! It won't be too hard to keep records. Just make sure that you know what company paid out how much!
• United States
30 Jun 09
Ouch! I never even thought of that! Thank you so much for bringing this topic up because it seriously never even crossed my mind, and I would never think of claiming my earnings on my taxes! It makes sense though! I guess before I make a pay out I will have to seek some advice on that because that is pretty scary! I do not want to get in any sort of trouble with the IRS. I am sorry your friend had to go through that but thank you for sharing his unfortunate situation because it really set off a red flag for me! Hope your friend gets out of the pickle he is in ! Take care !!
@reinydawn (11651)
• United States
30 Jun 09
Check out my response for some good tips on this!
@cbantly (236)
• United States
1 Jul 09
I think a lot of people think that because it's online, that it doesn't matter. They couldn't be more wrong! I remember reading about a guy that fled the country because his online gambling business was not only profitable, but also very illegal. The IRS was pursuing him, along with authorities, and trying to hit him with millions of dollars in fees!
• United States
30 Jun 09
Yes you should report any income that is over 600 per year per source. See the catch there. Apparently he must of made more than that in one source like maybe Ebay? I also have a paypal account and to be honest I have always added to my paypal from it never have deposited to my bank account from paypal.. I haven't made enough to claim yet. Will see by the end of the year. Oh and yes if you do earn more than 600 from one source they are by law suppose to send you a 1099 of those earnings. They can be penalized if they don't. Thats what I learned in the past from my mom who did taxes for over 30 years before she passed.
@cbantly (236)
• United States
30 Jun 09
Thanks for the information! I'm not exactly sure what his sources were, although I know that he did make a fairly substantial amount.
1 person likes this
@reinydawn (11651)
• United States
30 Jun 09
You're pretty close, but still some misconception there. See my post for more information.