In short: pay it. There's way too many threads in this forum about "how do I report my income? Does my PayPal income have to be reported?" so here's a basic guide for Canada, the USA, and probably most other countries concerning filing taxes. Do I have to report all of my online income, including PayPal payments? Yes. The internet might not be as "real" as brick and mortar business, but money is money. You make the money, EVEN IF YOU KEEP IT IN YOUR PAYPAL ACCOUNT you need to declare it and pay income tax on it. If I get a bank account in Croatia/Virgin Islands/Bahamas/Iraq/Random Country do I still have to pay income tax in my country on that income? Yes. You have to pay income tax on ANY INCOME YOU MAKE regardless of which country in which you reside for at least 183 days of the year and in which country that money is left. For the best income tax benefits, how should I create my company? Should I incorporate or go for a sole proprietorship or partnership? The main difference between these three forms is simple: in partnerships and sole proprietorships, you pay only personal income tax. When incorporating, you pay corporate income tax before your personal income tax. In terms of tax benefits, depending on your state/province, one might be better than the other, but I generally recommend incorporating, as you are no longer 100% liable for the business. Meaning, if you get sued and you're incorporated, you might lose everything the company owns, but you still retain all of your personal assets. However, if you have a sole proprietorship, you are 100% responsible for any amount of money owed. How can I avoid paying income tax? You can't. Deduct your business payments, but beyond that, do what the rest of us do and actually pay your share of taxes. Your education wasn't free. (If Canadian) your hospital visits aren't free. This is what your taxes go towards. Nobody particularly likes paying them, but you have to, and it's unfair to the rest of us if you don't. What will happen to me if I completely ignore your advice, Hannah, and don't properly file my income tax? While you might get away with it for a while, if and when you do get caught, the results aren't good. http://abc.net.au/news/stories/2007/07/19/1982566.htm?section=australia http://www.unionleader.com/article....rticleId=171667b0-9425-46c5-8f2b-ca55727a5505 http://72.14.253.104/search?q=cache...+jailed+income+tax+evasion&hl=en&ct=clnk&cd=3 Is a few thousand dollars over the years really worth jail time? Those were just results from the first page of Google. It happens, and you don't want the IRS or Canada Revenue after you for income tax evasion.
The above is certainly not true for the UK and nor is the off shoring element fully accurate. If you offshore the company to a country without corporation tax and do not draw an income from the company you neither have to pay income tax (as there you arent getting an income) and probably dont have to declare the payments as countries that do not charge corporation tax typically dont ask for declarations of income either. In the uk, if you were to dissolve the company whilst it still has possitive assets then the company shareholders would pay capital gains tax rather than income tax. Some people who effectively dont need the income from their companies will do this sort of thing, sometimes using off shored accounts, as it can be an easy way to mitigate your tax payments, esp as their is nothing to stop you forming another company straight away with all the details identical other than company number and start trading again - particularly useful if you have multiple income streams and want to use it as a mechanism to share the monies earned with partners/ wife/ kid trust funds etc I do however totally agree with the principle of the post that you simply have to accept that tax is payable and just do it, but there are legitimate ways of mitigating it which is where accountants earn their fees
Thanks for specifying re: UK. I only really know it applied for the US/Canada. Also, I will specify that my post concerning the offshore banks were meant in terms of having a bank under an individual's name, not a company name. Thanks for adding the company info.