I was just wondering what other webmasters do when it comes to tax time. I currently run all my payments through paypal. I made, lets say $10,000 this year, $6,000 of which I have re-invested into my businesses through paypal purchases, and $4,000 of which I have deposited into my bank account from Paypal. So, I would just have to pay taxes on the $4,000 I deposited into my bank account right? Does Paypal send you any tax forms at the end of the year? Just wondered the best way to handle this, and what I need to do when tax time comes. Any suggestions or feed back is greatly appreciated, Thanks
Assuming all the purchases were business related you are correct about owing on approx $4K. The process for getting there is a bit more cumbersome. You must report the gross amount and provide a catergorized list of expenses that reduce that amount to net income. Social security and taxes are paid on the net income. Typical expenses include: Cost of goods sold. Business portion of web hosting. Advertising in all forms. Commissions paid to others. plus some I did not think of right now. Home office and computer expenses are risky if you do not have a dedicated area and detailed usage records to back up your claim. Auto expense might be an option if you sell to local businesses. edit: You can still download the entire years worth of transactions from PP. Not sure about the formats available.
You may have more or less than $4,000 in taxable income. There are deductions such as depreciation and auto expenses that don't match up to cash out. You might also qualify for a home office deduction. I suggest you do lots of research on your own, or find a good tax accountant. As ColbyT said, the process of taking these deductions is not simple. It usually requires multiple forms on your tax return.
this is a good question. I have always done my own taxes and when you are self employed, you can deduct pretty much anything that is used in your business. this is the first year I have actually made money online. I spent more than I made, so I actually have a loss. If you buy an ebook to help you learn about more business ideas, is that deductible?
Paypal is a bank. They only file for the money you earn from them. It's just like your brick bank. If you deposit money in the bank, it isn't reported by the bank as a payment from them. They will send you an interest statement if its over ~$10, I believe. Ebooks would fall under the same principle as regular books. If it it was for business purposes, it is deductible. Your ISP bill could be a deduction, but it would have to be pro rated similar to the way home office expense is calculated. Any expensive computer equipment purchased (IIRC >$100) would require amortization which makes it a huge pain. Be sure to look up section 179 if you have any of those purchases.
You need recips for business related expenses. Gross = 10k Write offs = hosting, advertising, graphic designer, website designer, domain name purchases, etc. You could technically write off the depreciation of your computer, ink cartriges for your computer, etc. There's a lot of ways to manipulate your taxes. If you can show that your business lost money, the government will refund the taxes on a portion of your taxed income(from a regular day job).
PayPal will not send any documentation. When you fill out your tax forms you can deduct business expenses against the gross income. Are you in the USA? If you don't want to use a tax accountant (a real one - not the ones sitting at the front of Walmart) then get a tax guide and software like Turbo-Tax that walk you through what deductions are allowed as legitimate business expenses. You would need Turbo Tax Business to get the extra forms required for a business. Remember that you can deduct banking fees & PayPal transaction fees (that 3% can add up). Start preparing your taxes now, so you can get any questions answered, and don't wait for the last minute.
Why get turbo tax? Check the irs.gov site for free online filing companies. Several that offer Schedule C, SE, plus the 1040. If you didn't make like $52,000, it's free. Just have to check their offerings before starting.
I don't trust putting my personal and income data into a third party database that could data mine the info. I use TurboTax on my desktop and print and mail the results.
I can understand that concern. But I can state for the record, I used two of those services and haven't had the information used against me. Believe the IRS puts restrictions on how the data is used. Doesn't rule out "if they get hacked" but there is a trade off. Oh yeah, to anyone looking to use those services. How they make their money is off of charging for the State Tax Returns. Don't pay them the 15 bucks, just print out the state forms and mail to the state revenue dept.