Money Matters, Part 1 of 6: Declaring PayPal Income

PayPal is the most common means of sending and receiving money on the Internet these days. There are a lot of common questions surrounding PayPal, though, and one of them is how to go about declaring income earned through this virtual bank.

The short answer is that reporting your earnings in PayPal is the same as reporting any other earnings you make. Come tax time, you must file income received via PayPal as you would other revenues.

PayPal isn’t a virtual credit card. It’s a virtual bank account, and any money deposited to your account is considered revenue by the government. You must pay income tax on that amount.

It doesn’t matter how long you wait to withdraw your money from PayPal to deposit it in your bank account. If you like, you never have to withdraw a penny and the money can sit in PayPal forever. But that doesn’t mean you’re exempt from paying tax on it.

Whether you’re in Canada or the U.S., your government requires that you report gross income – the whole shebang.

One advantage is that since you’ve earned that income through self-employment, you can deduct any expenses you made to gain that revenue. Your PayPal fees are considered business expenses. Your internet connection, computer repairs and software, books… these are all business expenses, too.

You don’t necessarily need any fancy means of keeping track of income and expenses. A spreadsheet, print-outs of PayPal confirmations or emails, even scribbled notes are fine. As long as you have the final totals of gross income, expenses and net income, you should be alright.

Is it worth it to not declare your PayPal earnings? Probably not. Your clients are going to write off your services as business expenses. PayPal does some income tax reporting, too. Your name is going to come up somewhere, somehow.

Don’t wait on any forms from clients, either. If you know a client should be sending you a 1099 and you don’t receive it, go ahead and report that income regardless. Better safe than sorry.

And while the government may be slow and behind on technology, these agencies aren’t stupid. They know there is a lot of money being exchanged on the Internet, and they want their piece of the pie. Eventually, they’ll catch up.

[tags] declaring income, tax filing for online business, using paypal[/tags]

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