How does an Internet entrepreneur report his income to the IRS? Does he even have to?

21 replies
I just got started with this, and I feel like I want to stop because I know NOTHING about taxes involved with this.

I made a small amount on money on Fiverr earlier this year. Less than $300, more than $150. My fiverr gig involved croudsourcing (shorttask), paying people a small amount of money to do simple tasks such as commenting on a video. It isn't just earnings, it's earnings-expenses.

That money is in my paypal. If I fail to make over $600 this year, do I need to pay taxes? I want to withdraw some of it to my bank. Do they report withdrawn money to the IRS? Because at this point I have not made a lot of money - I made about as much as someone would make selling old stuff from his garage on ebay (and I DID sell an old DS). And if my earnings remain small - just $200 - I probably won't bother reporting. So would it be safe to withdraw to bank or do I leave the funds in my paypal.

Now, I plan on doing something else. I want to sell a product of service in the freelancer marketplace (freemarket.com). To promote the product or service I want to hire a marketer through freelancer.com. Projected profits: $300. That might bring me OVER the $600 mark for the year.

Do I need an Employer Identification Number (please tell me I don't - if yes I'm screwed)? I won't go to one of those expensive tax prep specialists (doing so would defeat the whole purpose leaving me with 0). I will use TurboTax. I won't be deducting Internet, housing, phone, etc. because I still live with my parents. And If I do report this income, how would I go about doing it? I have no company name, no EIN, no nothing. I want to at least deduct the expenses resulting in hiring a freelancer and using shorttask. Do I need to jump through hoops or go through red tape? Because I want to hire a freelancer this week.

Please answer the questions. Would withdrawing something to my bank raise a red flag or is it safe? Do I need to report income quarterly or April 15 when everyone else does? How do I deduct my small expenses from this? And should I drop this whole thing, take the small amount I have earned and walk away?
#entrepreneur #income #internet #irs #report
  • Profile picture of the author JR Consulting
    You need to ask a professional tax consultant or a lawyer, or both... not random people on an internet forum.
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    • Profile picture of the author george3985
      Originally Posted by Jeffrey Reidy View Post

      You need to ask a professional tax consultant or a lawyer, or both... not random people on an internet forum.
      DID YOU READ WHAT I SAID??? That would eat away ALL of my current online earnings!!!
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      • Profile picture of the author JR Consulting
        Originally Posted by george3985 View Post

        DID YOU READ WHAT I SAID??? That would eat away ALL of my current online earnings!!!
        Of course I read what you said, or I wouldn't have answered you. You asked a question, which to me means that you want an answer. Don't get pissed because I didn't just tell you what you wanted to hear. It's the cold hard facts of doing business, online or offline. You need expert advise or you could end up screwed in the longrun.
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      • Profile picture of the author deen_ad
        Originally Posted by george3985 View Post

        DID YOU READ WHAT I SAID??? That would eat away ALL of my current online earnings!!!
        Responses like that will get you nothing, probably not even an answer to your original question.

        The correct answer is: contact a tax professional for the final answer or you could be having an IRS audit real quick. But ALL income is reportable, not just if it's over $600. As to if it's taxable: that will depend on how much you make.
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      • Profile picture of the author Dan C. Rinnert
        Originally Posted by george3985 View Post

        DID YOU READ WHAT I SAID??? That would eat away ALL of my current online earnings!!!
        Tax penalties may be worse.
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      • Profile picture of the author Jeremy Banks
        Originally Posted by george3985 View Post

        DID YOU READ WHAT I SAID??? That would eat away ALL of my current online earnings!!!
        I will help

        I talked to my accountant he said for income under a few thousand you can just claim it as additional income on your tax return and state the source if asked.

        This is what I did for a few years when I just did this as a hobby
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      • Profile picture of the author Meharis
        Originally Posted by george3985 View Post

        DID YOU READ WHAT I SAID??? That would eat away ALL of my current online earnings!!!

        I suggest reading the rules of this forum will help you to act as an educated and respectful person.
        Common sense rule: If you may not like the answer don't ask.
        Meharis
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  • Profile picture of the author Dan C. Rinnert
    If the money you're making is small, you can most likely report in annually like normal.

    Do you have a regular job? If not, and you're making less than $600 a year online, with no other income source, you probably do not have to file taxes. I don't remember what the threshold is, but below a certain annual income, you don't have to file.

    If you do have a regular job, then you will need to report your additional income made online. Doesn't matter if it's $600 or $60. The $600 threshold is for people who've paid you to report it to the IRS. But you should report all your income even if your online income is less than $600.

    If your online activity is a business rather than a hobby, you can deduct expenses.

    You don't need an EIN just yet. Though they are free, so you can get one if you want.

    You should really talk to an accountant. I am not one, so none of this should be considered professional advice.
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  • Profile picture of the author DogScout
    You can report income under your own SS#. Yes you have to pay if it adds up to over the poverty level in the US, (around 11k). The $600 mark refers to the amount from any one place. You need to report any income that is reported to the IRS by the place that paid you. Many do not bother to report amounts under $600, but some do. How will you know if they did? They have to send you a 1099 form between Jan1 and Feb. 1 the following year. You would need to report all income on any 1099 form you received. IF you do not receive a 1099 from a company you got under $600 from, you are not required to report it. If you do not recieve a 1099 from a company you got more than $600 from, better count it and/or contact them to send another copy as it must have been lost.

    For more info, go to the horse's mouth. You certainly do not need a lawyer for the amount of money you are talking about.
    Tax Information for Individuals
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    • Profile picture of the author erichammer
      Originally Posted by DogScout View Post

      IF you do not receive a 1099 from a company you got under $600 from, you are not required to report it.
      This bit is inaccurate. You are required, legally, to report all income you earn to the IRS, even if it's less than $600 from one place. Some people don't do so, however, they risk a potential audit and fines from the IRS for failure to report income.

      You also must file your taxes regardless of how much you earn. It used to be that there was a threshold, but not anymore. Now everyone has to file, though if your income is below a certain amount, you not only won't pay taxes, but can also get a refund (it's called the earned income tax credit). The amount isn't much and the total required income is fairly low, but it is something. You can use automated tax software online to file -- they all include spaces to report miscellaneous income and they will all automatically compute whether you are entitled to the EITC.

      Also, any expenses you incurred while earning that income can be legally deducted. However, they need to be expenses exclusively related to the cost of running your business. For example, if you have a home office, the cost of the rent and utilities for that home office are deductible ONLY if it is used exclusively as your home office. That means that setting up a computer in the family room doesn't exempt the family room, but if you have a separate room entirely where you conduct your business and where you don't conduct personal business, that is deductible. However, claiming a home office is also an audit trigger, so it's usually not advisable to claim unless you will save substantially by doing so.

      The person who said you don't need an EIN is both correct and incorrect. You do not need an EIN for any reason, unless you begin hiring employees or you incorporate. If you are just working for yourself, you only need to file under your own social security number.

      Regarding your questions about reporting, PayPal recently agreed to new rules which say that if you earn more than $20,000 per year and have more than 200 transactions for the year, they will report what you earn to the IRS. Banks are required to report transactions over a certain amount of money ($10,000 I think, but I'm not certain) to the IRS as well.

      FYI, regarding to the original statement you made that it's less than what you might have earned from a garage sale, while most people don't report income from a garage sale, they are technically legally required to do so. However, they can theoretically also claim the loss for the value that they lost when they sold property, though it needs to be amortized for the length of time they owned it.

      In other words, that dirty old catcher's mitt you sell for $2 at the garage sale and which you bought twenty years ago for $15 is reportable income, however you can deduct the initial cost minus the amortized value of 15 years of use. And yes, that's really ridiculously complicated which is why most people don't bother with reporting such income even if technically they are supposed to do so.

      It should be noted that I am not a tax professional, however I've been doing this (working independently) for a while now so i know a little something about this. Consider my advice like that of a friend rather than that of a professional. In other words, legally my advice is not legally actionable.

      If you want to know for certain, you do need to ask a tax professional, However the IRS also runs their own hotline that you can call and ask questions at for free. Just visit IRS.gov to find the phone number.

      Eric
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  • Profile picture of the author wickle27
    Contact a tax professional!! No reason to take short cuts which can lead to long term headaches!!
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  • Profile picture of the author DogScout
    'tax experts' like lawyers and accountants may know no more than non-experts, (in my opinion). I have seen 50+ doctors for a single condition and have 30+ diagnoses and 40+ prescribed treatments. That means at least over 80% of those supposed experts are wrong. May as well flip a coin and get better odds.


    PS- Only people I know have been audited had their taxes done by 'experts'
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  • Profile picture of the author rickfrazier1
    First, I am not a tax accountant or lawyer, and cannot advise you in eather arena, but generally, there are some rules that do apply to you. Second, I'm assuming you are in the U.S.

    First thing to ask is, do you have any other income (like a regular or part time job) where the employer is withholding taxes?

    Second, you do have a social security number? This is essential to keep everything tracked properly.

    Generally, if you do have any other income, there will be withholding of FICA (Federal Insurance Contribution Act). FICA is paid half by you, and half by your employer. It amounts to around 12.5% of your earnings. If you don't have an employer, you are considered self-employed and will have to pay both halves. This is one of the downsides of being an independent. FICA is what you pay into the social security fund. The idea was that you pay into this fund over your earning lifetime, and then take it out as social security payments when you retire. Unfortunately, the feds took the FICA money and dumped it into the general fund, so good luck getting any of it back by the time you retire...

    Income tax is a graduated tax. That is, at low levels, your tax rate is a smaller percentage of earnings, and at high earning rates, is a much higher rate. If you were making a million dollars a year, it amounts to around 38%, if I recall correctly.

    You are responsible for making sure you make quarterly payments such that the income tax due at the end of the year is within a reasonable amount of what you have already paid. If you under-report or under-pay, there is a penalty when you file (no later than April 15th the following year.)

    Now, If you have income less than the "standard deduction" for an individual, it is very likely that there will be no income tax due at all. However, I can't say regardiing the FICA tax. Yes, even though it is supposedly a "contribution" it is a tax. I've not dealt with anyone that had a very low income for years, so don't know if there is a minimum amount you need to make before you are required to pay FICA.

    Bear in mind that there may be other taxes that come due. Counties and even towns or cities may also impose various taxes on money you earn while living or operating in their areas.

    The $600 figure most people throw around is the level at which an entity (business or individual) must report to the IRS if they pay you for products, servcies, and so on. Thus, if you make less than $600 through any one place (like PayPal), they are not required to report that payment to the IRS. Some report everything, just to be sure. If they do report, you will recive a form 1099 in January or early February from them. It tells you how much they reported to the IRS.

    One of the things you can do to get a more definitive answer is to call the local IRS office. This time of year, they aren't too busy, so may actually provide a meaningful answer. Just tell them you want to make sure you do the right thing, and ask if you need to make quarterly payments if you expect to make $600 this year online. If you have other income, estimate how much is "regular income" through employers, and how much is from your online efforts. However, just because they tell you it's all right, don't be surprised if you have some obligation at the end of the tax year. (They aren't always correct with the advice they give you on the phone...)

    At the levels you are talking about, even if you do have to file, and even if there is a penalty for under-withholding, it won't be very much. I always put money into a savings account that was to pay for the taxes I thought was going to be due, and in the cases it wasn't, I had some "extra" cash to spend. It was sort of like getting a tax refund.

    You're going about it in the right way, trying to find out up front what your obligations are, the only problem is that you may get a dozen answers here on the forum, and because none of us are "enrolled agents", tax attorneys or otherwise experts in the tax laws, the advice you get may be pretty well worthless...
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  • Profile picture of the author Rich Struck
    I can't believe the stuff I see on this board sometimes.
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  • Profile picture of the author jacktackett
    This is a very good question - but shouting at us will not get you answers.

    accountants, bankers, lawyers etc are a valuable member of your advisor team. Probably the best place I've seen this concept discussed is in a book called Rich Dad, Poor Dad.

    If this is to be a business to you, then you need to get some education so you can talk and understand these folks. online and the local library will have plenty of intro material to read - start reading. There are lots of things to consider in running a business. I find it fun and great - but following all the rules a bit of a PITA.

    A fundamental item to learn if you're a US citizen is if you earn money you pay taxes. Evading taxes, at any level, can cause serious issues. Not the least of which is the elimination of the statute of limitations - if the IRS feels you've cheated in any year and they prove it - then they can literally audit every return you've submitted in your life. Granted a worst case scenario - but possible.

    Look, tax avoidance is legal - so report your income and even it remotely smells like a deduction take it (please don't fake deductions - too risky IF you're caught). if the IRS rules it invalid say you're sorry and pay the tax, interest and penalty. My accountant told me when I first started with him that as a small taxpayer filing schedule C (the schedeule you report business income on in the US) that its just a matter of when the IRS will audit you, not IF.

    But no big deal if you've reported ALL your income and have proof for all your deductions. The worst they can do is invalidate the deduction and ask you to pay up. Bummer - you got called offsides, take the penalty and move on. If you play the 'game' hard you'll get called offsides sometime.

    But hide income, invent deductions, and you're just asking for problems IF you're caught. Not worth it IMHO.

    Can't afford an expert now? Go networking - people love to talk about what they do - accounts and CPAs are no exception.

    As someone else has said - this forum is not the best place to ask for specific advice on anything but marketing. Now is someone is a CPA from your area, or a lawyer etc then they may drop in to offer some advice.

    Finally - read up on running a small business - so you can evaluate the answers you get.

    good luck and welcome to our world.
    best,
    --Jack
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  • Profile picture of the author george3985
    Just did some research, looks like I'm going to be filling out the schedule C-EZ: irs. gov/pub/irs-pdf/f1040sce.pdf

    It just has a field for net profits and net expenses, and the websites I used keep track of both. And sorry for sounding silly, but how would I hten go about actually paying the tax? All my previous employers just withheld part of my income and all I got in April was a refund. Would I mail a check to the IRS or wire it?

    And paying a freelancer for his services is classified as a business expense; NOT hiring an employee, right?
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  • Profile picture of the author HeySal
    Look, tax avoidance is legal - so report your income and even it remotely smells like a deduction take it .........
    Um...hey Jack? Is it safe to assume that that's a typo or did you start drinking BEFORE the convention?
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    • Profile picture of the author Tsnyder
      Originally Posted by HeySal View Post

      Um...hey Jack? Is it safe to assume that that's a typo or did you start drinking BEFORE the convention?
      Tax avoidance is completely legal... and smart.
      Tax evasion, on the other hand, is a felony.

      As for his assertion that you should claim anything that
      even remotely smells like a deduction... that advice probably
      involved some amount of alcohol... lol
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      • Profile picture of the author HeySal
        Originally Posted by Tsnyder View Post

        Tax avoidance is completely legal... and smart.
        Tax evasion, on the other hand, is a felony.

        As for his assertion that you should claim anything that
        even remotely smells like a deduction... that advice probably
        involved some amount of alcohol... lol
        Haha. Oops - I read "avoidance" as "evasion". Maybe I should knock off for the night.
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  • Profile picture of the author Robert X
    Quit it with the tax avoision! Just add it on to the pile at the end. When you do your taxes, there's always a thing that asks for additional income. you'd only be taxed a little bit.
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