Category Archives: Taxes

Paypal Income Reporting Requirements for Bloggers

Written by in Business, Taxes
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For tax year 2011, the IRS did something very interesting: they required payment settlement entities to file Form 1099-K for payment transactions. This includes PayPal accounts that received at least 200 transactions and $20,000 total during the calendar year.

If you’re a blogger, the majority of payments are made via Paypal, so this adds a completely new hassle to the income reporting equation. The two biggest problems are:

  • Not everyone uses their PayPal account solely as a business account. For sole proprietorships, some payments from businesses should be marked as income. However, payments made from friends shouldn’t be. The IRS requirement doesn’t differentiate the different payments (unless they are made as personal payments). Therefore, in some cases, the 1099-K issued by PayPal may over-report income.
  • This also raises the issue of being taxed twice on the same income. If someone pays me over $600, they are required to file a 1099-MISC. If they pay via PayPal, PayPal then records that payment on the 1099-K. We shouldn’t be required to pay taxes twice on the same income!

The 1099-K changes are designed to prevent tax evasion, which amounts to over $300 billion a year in the U.S. I like the idea of holding people responsible for their taxes, and this holds people accountable for their online business ventures which in the past may have gone under the radar. For example, eBay re-sellers are required to report their online income, but it’s been easy to avoid it in the past.

However, this puts a large burden on taxpayers. eBay sales of used goods will still show up on the 1099-K, even though they shouldn’t be considered taxable income (if you sell something for less than it’s worth, it’s generally not taxable).

Because this is so confusing, the IRS did something smart. Really smart. On December 6th, the IRS released the 2011 Instructions for Schedule C, the form to mark profit or loss from business, and in it they gave all business owners a little reprieve and helped us prepare for our 2012 taxes as well.

First, while the 1099-K requirement still stands for 2011, the IRS has deferred the requirement to report the amounts on the 1099-K.

“However, for 2011, the IRS has deferred the requirement to report these amounts.”

What this means is that while you may get a 1099-K from PayPal, you don’t have to record that number on your taxes. You are, of course, still responsible to pay taxes on your income that you received through PayPal, but you can do it the same way it’s been done in the past, by recording only the actual business income on line 1b. You can simply enter ’0′ on line 1a.

Additionally, the 1099-K reporting requirement eliminates the need for some 1099-MISC filings, according to Don Frank, partner-in-charge of outsourcing with CliftonLaronAllen. The 1099-MISC indicates (in a not-so-straightforward way) that businesses should not complete Form 1099-MISC if the payment will already be reported on a 1099-K. So if someone pays you via PayPal and you will be issues a 1099-K, you won’t need to be issued a 1099-MISC as well. This avoids the double taxation issue.

Kudos to the IRS for realizing what a hassle this would be for 2011. I’ve started to prepare for 2012 by separating my personal and business PayPal accounts and by tracking PayPal transactions separately so I won’t have to go through at the end of the year and figure out which transactions were included on the 1099-K and which need to be recorded on the schedule C separately.

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Should Tax Evaders Be Given A Safe Haven?

Written by in Taxes
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In 2009 and 2011, the IRS has given tax evaders who have hidden money in offshore accounts a chance to come clean and avoid jail time. The two programs have netted the IRS at least $4.4 billion so far, but should the rules be relaxed for these people?

Taxpayers who disclose offshore accounts must pay a 27.5% penalty in addition to any back taxes, interest, and late charges for up to 8 years. But they avoid going to prison.

$4.4 billion is a nice chunk of change, and that lets the U.S. public off the hook for that much money. So maybe we should all be fans of these types of programs. Others will argue that the rich can just pay off their crimes and avoid any real punishment.

Tax evasion costs over $300 billion a year, so we want back as much as we can, right? Maybe $4.4 isn’t a huge number overall, but for the amount of offshore money hidden, it seems to be a decent pull.

I’m just starting to do my taxes and I’m doing everything I can to report properly and follow the laws. I’m not trying to avoid my tax duties. If I do, then it means someone else will have to make up the difference. I don’t like passing the buck on to someone else.

Based on our current economic situation, I am in favor of collecting these payments. The penalties are harsh enough to still make it hurt, and the benefit of a clean conscience, having the money back in the U.S., and not having even more penalties if they are caught instead of turning themselves in.

Readers, what do you think? Should we accept money we wouldn’t have otherwise have or should we be stricter with people who hide money from the government?

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Tax Evasion Costs Over $300 Billion Each Year

Written by in Taxes
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Think tax evasion is a small problem? The Tax Justice Network released a report in November 2011 that showed that in the U.S., tax evasion amounts to $337.3 billion a year.

This was based on numbers from 1999 to 2006, and could be even higher in recent years as the weak economy may have led more people to hide money from the government. For example, the average tax refund decreased by $100 in 2011, maybe people are reporting less income in order to keep more of their money.

It’s hard to wrap my head around how much money that is. Congress was recently unable to agree on a plan to reduce the national deficit by $1 trillion over 10 years. Over the same time period, tax evasion will cost us well over $3.3 trillion.

I’m a big proponent of everyone following the tax rules. When we don’t, it means that everyone else has to pick up the slack. Because of this fraud, tax rates are likely higher and future generations will be paying for current expenses.

The IRS is Catching More Tax Evaders

The good news is that the IRS is doing a better job of catching people who aren’t paying their fair share of taxes.

Fraud investigations increased by 14% in 2010, while prosecution recommendations (cases that the IRS thinks should be brought to court) increased 18% and convictions increased by 4%.

Again, it’s possible that some of these increases are due to the economic situation of the past few years, but the fact that the IRS decreased its investigation time by nearly 40 days is another good sign that the IRS is doing a better job.

Don’t Give In To The Pressure

It’s really easy to hide money from the IRS. After I sold my HP TouchPad for $100 profit, it would be really hard for the IRS to track down how much I paid, how much I sold it for on eBay, and how much of a profit I made. So I could hide that pretty easily. But I’m not. I know that people don’t admit to cheating on their taxes, but the fact is that it happens. Stay true, and help reduce that $337 billion number so that future generations are stuck having to pay it!

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Planning for Social Security Taxes in 2012

Written by in Taxes
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With the last minute agreement to extend the 4.2% individual social security tax rate into 2012, we now can start looking at planning our tax situations for 2012.

Well, sort of.

We have our individual income tax rates set, we know our state tax rates, but by only extending the social security tax cut for 2 months, Congress has made it harder for us to plan. We don’t really know whether we can count on that 2% tax savings for the entire year or if our paychecks will become a little bit smaller come March 1st.

Originally, having the tax rate go back to 6.2% would have meant an increase of $2,340 for those who make $110,100 or more.

With a 2 month guaranteed tax break, if Congress really can’t agree on an agreement for the other 10 months of 2012 and the social security tax rate does indeed increase to 6.2%, that will cost taxpayers who make $110,100 or more a total of $1,950. That is not a small sum at all!

However, I do believe that since both Democrats and Republicans have shown indications that they want to extend the tax break through the end of 2012, and while I have no idea how they’ll come to an agreement, I do think that we will see the social security tax rate remain at 4.2% through the end of the year.

While I don’t advocate spending the money before you have it, I think it’s safe to calculate the savings over the course of the year. Maybe that will be extra savings that you can put toward retirement, or maybe that’s a grand or two that will go toward paying off debt. Either way, use it wisely and enjoy your extra savings in 2012!

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