Family and Friends Payments

[mkbrenner]

If friends and family members have paid me over $600 using the Family and Friends option on PayPal, not for goods and services, do I have to claim it on my taxes?

[Donna F 77]

Payments from your friends and family that are not for services rendered by you or items sold by you are not taxable on your tax return. 

[tlabors]

yes, thank you for answering this question!!!! how do you prove it was from friends and family? what happens to the friends and family for giving it t us?

[Donna F 77]

If it's not business income to you, it is not a deductible expense to your friends and/or family.  There is no consequence to using these forms of electronic payments for normal non-business transactions.  If you were to receive a tax form from these transactions that are non-business you would be able to show them on your tax return and also show a corresponding negative amount to remove them from being taxed.  However, I do not think you will need to worry about this.

[RedhairMac]

So manual labeling of the transaction on 3rd party payment apps is what determines taxability??  

[Donna F 77]

The label your friends or family use when making the payments tells Venmo that the payment is for Goods or Services.  It does not determine whether or not it is a taxable transaction for IRS purposes.  If you are actually providing goods or services to the friends and/or family is what determines if it is taxable.  If Venmo sees a payment marked for Goods and Services, they may report it to IRS as income that you received.  You will be able to include it on your tax return and also show it as a negative amount on your tax return as well if you have a payment that was incorrectly labeled. 

[RedhairMac]

So if I was paid $2000 on a 3rd party payment app in 2022 for goods I sold, would the entire amount be taxed or just the amount over the $600 threshold?

[Donna F 77]

Probably neither amount would actually be the taxable amount.  The amount you would claim as income on your tax return would be the full $2,000.  You would then be able to reduce that income by any related expenses that you incurred.

[Opus 17]

@RedhairMac 

@mkbrenner 

@Donna F 77 

We have to keep separate the concept of taxable income and reportable transaction.

The payment processor is required to report payments.  They report the entire amount of payments, if the annual total is more than $600.

However, reported payments are not automatically taxable income.  Whether a payment is taxable income depends on what the payment is for.  Under the new rules, the IRS is going to want to see some description of what the payment is for and whether or not is it all taxable, partly taxable or not taxable at all.

Gift from family and friends are never taxable.  If the processor reports them to the IRS, the IRS is going to look at your return to see if you provided an explanation.  We don't know yet if the IRS will create a new procedure since so many more people than before will be getting a 1099-K.  There were two old procedures that could be used.

a. Leave the 1099-K off, file by mail, and attach a written explanation.

b. Include the 1099-K as "other income", then create a negative 1099-K to remove any part that was non-taxable (like gifts). 

You need to keep records in case the IRS sends you a letter asking for more details.

If you are selling goods, that is an entirely different question, because the gross proceeds that go through the payment processor is not necessarily the taxable amount, which depends on the type of business or hobby, the cost of the goods, and other factors.  But that's a subject for a much longer post. 

[RedhairMac]

You’ve been really helpful…thank you…last question: I personally delivered many of the goods I sold.  Can I expense mileage and, if so, how do I do that!

[Opus 17]

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@RedhairMac wrote:

You’ve been really helpful…thank you…last question: I personally delivered many of the goods I sold.  Can I expense mileage and, if so, how do I do that!

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If a hobby, you can't deduct any expenses, including mileage.

If you are reporting this as a business, you can deduct your delivery mileage using the IRS standard mileage rate.  You need to have a record, like a diary, log book or app, that shows the date, purpose of trip, and miles driven.  When preparing your schedule C in turbotax, you will be asked directly about mileage.  There is more information in chapter 4 of IRS publication 463.

https://www.irs.gov/forms-pubs/about-publication-463

[RedhairMac]

Ok, so we’re back to hobby vs. self-employed.  I was told earlier by another expert that if I sell goods for profit, I’m self-employed.  However, I consider what I do as a hobby….no expense records kept.  The response above cites “IF” this is a hobby….which connotes that the taxpayer is able to make a choice, e.g., business or hobby.  Is the choice truly mine or, as stated by another expert, is there no choice and I’m automatically considered self-employed?? And if I get to choose that my side gig is indeed a hobby, then all income over $600 is taxable without the benefit of writing off expenses?  How is that fair??

[Opus 17]

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@RedhairMac wrote:

Ok, so we’re back to hobby vs. self-employed.  I was told earlier by another expert that if I sell goods for profit, I’m self-employed.  However, I consider what I do as a hobby….no expense records kept.  The response above cites “IF” this is a hobby….which connotes that the taxpayer is able to make a choice, e.g., business or hobby.  Is the choice truly mine or, as stated by another expert, is there no choice and I’m automatically considered self-employed?? And if I get to choose that my side gig is indeed a hobby, then all income over $600 is taxable without the benefit of writing off expenses?  How is that fair??

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1. The IRS has a list of factors to be considered.

https://www.irs.gov/newsroom/heres-how-to-tell-the-difference-between-a-hobby-and-a-business-for-tax...

You make whatever determination you like, but those are the factors the IRS will consider in the unlucky chance of an audit.

If you characterize a hobby improperly as a business (to deduct more expenses) the IRS can reverse that if you can't prove your case, but likewise if you characterize a business improperly as a hobby (to avoid self-employment tax, for example) the IRS can also reverse that if you can't prove your case.

2. All your taxable income is taxable, not just income over $600.  $600 is the level that triggers a report, but if you have taxable income, you must report all of it.

3. You have never actually stated why you get paid, you chimed into a question about gifts from family and friends but that does not appear to be your situation.  If you are selling personal tangible property, you only pay tax on items sold for more than their cost, but the burden is on you to prove it.  See for example this question and answer.  

https://ttlc.intuit.com/community/file-with-turbotax/discussion/re-selling-on-ebay-but-selling-my-ow...

4. Remember as I stated above, the payment processor reports the total transactions on a 1099-K.  Whether or not that is taxable income, and what kind of taxable income, and how much, is up to you to prove to the IRS.  The report by itself does not make the income taxable, but it tells the IRS to look for some kind of explanation on your tax return.