Alright, my father is a Certified Public Accountant in New York State. While he doesn't have time to write a response, this is his view on it:

Once the money hits your paypal account, it's your income. It doesn't matter how long you wait to withdraw it, or even if you never writhdraw it; becuase YOU choose when it can come out of the paypal account. It isn't like paypal is saying, "You can't withdraw your money for 6 months". If that were the case, there might be some question about if you had income or not. Bottom line: once money hits your paypal account, it counts as your income.

The IRS requires you to report your income gross, before your expenses. Then you may deduct your expenses to arrive at your net income, so therefore you would have $500 of income, less $150 of advertising expense, and a net income of $350. If you are not a corporation, you would be required to report this on your Form 1040 Schedule C, titled "Profit or Loss from Business". You would also have to complete Form 1040 Schedule SE, titled "Self Employment Tax," which is social security taxes on your net income for $400 or more. In addition, other expenses might be deductable, such as the cost of internet access, cost of your computers, part of your electric bill, etc.

My dad suggests you consult with a professional tax advisor for more in-depth information .