Paying tax on PayPal

[Dani]

Here in New York, how do I go about paying taxes on PayPal? For example, suppose I start out a month with a PayPal balance of $0. The first week of the month, I earn $500 selling advertising space on DaniWeb which goes into my PayPal balance. I never withdraw anything. The third week of the month, I spend $150 purchasing ad space on another website, which comes directly from my PayPal balance. At the end of the month, I direct deposit the $350 I have into my bank account. According to the U.S. government, did I just make $350? Or did I make $500? I only ever saw $350 of it. Does a PayPal balance count as real money or does it not count as real money until it is in the form of a check or ends up in your bank? I have heard people consider a PayPal balance simply a form of online credit that is associated strictly with the paypal.com service. In other words, it isn't real money until you withdraw from PayPal.

[dazzlindonna]

I'm certainly no tax person, but if you spent the money on web hosting, then it was real money, was it not? You can't spend it if you don't have it, right? Anyway, you can claim the hosting expense as an expense so it all comes out in the wash. I'd ask a tax person if I were you, but I think *legally* you'd need to claim the income, but you could then also claim the expense.

[Dani]

Well, everything I earn/spend via PayPal is to/from an individual person for a service. Similar to if I were to pay a friend $50 cash to help me out in something.

[senterstyle]

Well, technically there is no actual "money" involved in PayPal accounts. PayPal is just a running total of how much one account was given from another and vice versa. It isn't until someone "cashes out" that money is actually "made and moved." PayPal is not a bank. Thus, their accounts are not federally insured, etc.

I have heard people consider a PayPal balance simply a form of online credit that is associated strictly with the paypal.com service. In other words, it isn't real money until you withdraw from PayPal.

So, basically, that is correct.

[Tekmaven]

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 ;).

[Dani]

OK Cool. Thanks :) The reason I wasn't sure was because one can have a PayPal account without ever being connected to a bank account or ever withdrawing any money at all. In such a case, PayPal acts simply as an online bartering system.

What I am going to do is just print out all of my PayPal history and send it off to the family accountant :)

[Tekmaven]

Well, you can't really do that either. You need to make a spreadsheet on which transactions you got as income, and which transactions you made paying for business deductions..

[dataware]

Hi everyone,

I am in Canada.

I know for a fact that both the IRS and world revenue services are indeed cracking down on paypal clients.

Mostly accounts generating over 10 000.00 in cash flow.

Replies are mostly correct. Keep track of income // expenses ... and if you have a small balance or large balance at year end, simply declare it.

If you have a negative balance, be prepared to declare it against future years income.

In a nut shell, each individual case is different and should be consulted by a proffesional.

All the best,
Lorenzo
Dataware

[Johnny Wolf]

I have a question kind of related to this. What if a person buys an Item on E-Bay.The seller lives in New York and the buyer lives in California. The buyer makes the purchase via Pay Pal and is not charged sales tax. Or is he/should be? Could you get in trouble with IRS at a later time?

[OurNation]

I don't think e-bay charges taxes (do they?) but I don't think you would get in trouble.

[jwenting]

Out of state mailorder purchases in the US are not subject to salestax.
Online purchases at the moment count as mailorder (there are plans to change that).

The seller of course has to declare his income from the purchase towards his income taxes (there may be a lower limit for this).

EBay themselves act only as an intermediary, they don't charge any taxes. Nor do other auction houses (though some do handle government taxes for the buyer and seller, acting as a clearinghouse for those).

[selfhelpebooks]

I would imagine an accountant or tax specialist would be of assistance.