How do you report your PayPal income?

[proboscis]

There are fees whenever you receive a payment, but they take them out before they ever go into your account. So do you report the whole amount and then list the fees as an expense - or do you just report the amount that you received after they took out the fees?

It would be easier for me to just report the amount that I received, it's less than 3500 for the year after they took their fees. Does it even matter?

[vincevincevince]

You'll get lots of answers here suggesting you find an accountant; and that is certainly the best advice. The only help I can be is to point out that the way in which it is treated will affect your turnover even if it does not affect your profit and loss account bottom line.

[dbdev]

In the words of the late Notorious B.I.G., "my accountant handles that".

[LifeinAsia]

It would be easier for me to just report the amount that I received, it's less than 3500 for the year after they took their fees. Does it even matter?

Yes, it matters. You may think it is "easier" to do it this way now, but it will be a lot harder later on trying to explain your creative accounting during an IRS audit.

The money you receive from customers is your gross revenue. The fees PayPal (or any other processor) takes out are fees that are legitimate expenses.

On your tax form, you add up all your gross revenue then subtract all your expenses to arrive at your net profit (or loss), which in most cases is the taxable amount.

Note: if you are in some areas (e.g., Los Angeles city), you pay local taxes based on your revenue, not profit. So not reporting your full revenue would be cosidered tax evasion.

[edited by: LifeinAsia at 4:46 pm (utc) on Feb. 27, 2008]

[proboscis]

Thanks LifeinAsia, and others, I'll just do it the hard way then... :)

[Fortune Hunter]

if you are in some areas (e.g., Los Angeles city), you pay local taxes based on your revenue,

Asia, your kidding right? I have never heard of anyplace including Uncle Sam that charges on revenue and not profit, how is this even legal?

[LifeinAsia]

FH,

I wish I was kidding. Back in the day when I was doing taxes, we had several clients who started doing home-based businesses and happened to live within (or moved withing) L.A. city limits, THEN found out about the city tax. (Yet another reason to do due dilligence before starting any business.)

There have been several pushes to revamp the system and make it profit-based. But like any tax change, what benefits some people will penalize others (if the taxes go to profit based, then the overall tax rates would have to jump to make up for the shortfall, so a some businesses would end up paying a lot more money), so there's never enough backing to push through a real change.

[edited by: LifeinAsia at 4:31 pm (utc) on Feb. 28, 2008]

[topr8]

>>I have never heard of anyplace including Uncle Sam that charges on revenue and not profit

well sales tax, or vat as we call it here in blighty, is a common form of tax and it isn't based on profit.

[vincevincevince]

topr8 - VAT is based upon added value as determined by the difference between your input costs and your output costs. It boils down to your profit less your labor costs for most small businesses.

Buy GBP100 of goods wholesale, pay VAT of 17.5% on them (total given to seller = GBP117.50). Sell them for GBP200 retail, add on VAT of 17.5% again - total taken from purchasers = GBP235.00.

In non-VAT terms, you've increased the value of the goods by GBP100 by moving them to the retail market. You owe that 35 pounds you took as tax payable, but you can reclaim the 17.50 you had to pay. Overall, you will send just 17.50 as tax - i.e. 17.5% of the GBP100 increase in value of goods.

Most of your other overheads will have VAT in them which you can reclaim; although notably not labour costs.