I'm a mechanic. I don't profit on parts, only labor. If a customer pays me with PayPal $1000 for a job, but $800 was parts reimbursement, what are the tax implications?

[dg_enterprises]

Specifically with regard to the new 1099K law. Will the IRS see that I got paid $1000 for this job but I only reported $200? And is this going to be a problem? I report everything anyway. Whenever someone pays me with Venmo and PayPal, I report it.

[Bsch4477]

There will be a way to separate your labor payments from materials cost when you file but you must have good documentation to justify what you report. 

[dg_enterprises]

Good documentation in case I get audited? Or will the IRS/state want to see this up front? Thanks for the reply!

[Mike9241]

what's the problem with reporting $1000 as income and $800 as an expense for the parts you evidently paid for  

[NCperson]

@dg_enterprises -  in your example, technically. you should be reporting the $1,000 as income and then $800 as an expense on Schedule C.  Yes, it nets to the same $200 of taxable income, but that way it will tie to any 1099Ks that you receive. 

[dg_enterprises]

Why make extra work? I get paid back exactly what I pay for parts. The parts are a wash. I just report my labor as income because that's my profit. 

[Opus 17]

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@dg_enterprises wrote:

Why make extra work? I get paid back exactly what I pay for parts. The parts are a wash. I just report my labor as income because that's my profit. 

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No.  You are self-employed, and the IRS expects you to run your business in a business-like manner.  That includes keeping accurate and reliable records of your income and expenses.  In this case, your income is $1000 and your expenses are $800.  

You report your small business on schedule C.  You list all your expenses and all your income.  You must report all your income, even if some income is in cash or comes to you via a method that does not issue a 1099.  If your gross income is more than the 1099-Ks you receive, that's normal.  The IRS expects that some of your payments might be via other methods (other apps, cash in hand, etc.)   If you report gross income less than your 1099-Ks, the IRS may ask for an explanation.  You should avoid mixing personal and business money in your accounts (make separate business and personal PayPal accounts, for example).

 The Schedule C itself does not itemize your income and expenses, it only shows a summary.  But the IRS has the right to audit you and ask to see your detailed expense and income breakdown.  In a worst case scenario, the IRS can even look at all your bank accounts, PayPal, Cash App, and other accounts, find any deposit that can't be explained, and assign it to you as business income.  They usually only go this far if they think your own business records are not believable, so it is in your best interest to keep detailed, accurate records. 

[dg_enterprises]

In my first post, I said I report all income.

I report all cash income, checks, credit cards, PayPal, Venmo on my Schedule C.

I also report all business expenses such as shop supplies, tools, etc, on the Schedule C. 

I use Quickbooks self employed to track all of my work orders. All my labor (which is my taxable income) gets reported on the Schedule C.

I am confused as to why the IRS is interested in parts I get directly reimbursed for. It's not taxable income. So if I buy a $4.95 intake seal in the morning, and the customer picks up the vehicle that afternoon and pays me back the 4.95, I need to report that 4.95 on the Schedule C as an expense? I do track all parts on the work orders. The work orders are itemized with a parts list. 

My ultimate question is this: If the IRS is now seeing PayPal and Venmo payments, they see me reporting less than the total amounts that they (IRS) see, will that trigger anything? Audit, etc?

I would be reporting less than the IRS sees because I'm only reporting the labor. 

[NCperson]

<<

 If the IRS is now seeing PayPal and Venmo payments, they see me reporting less than the total amounts that they (IRS) see, will that trigger anything? Audit, etc?

I would be reporting less than the IRS sees because I'm only reporting the labor. >>

yes it could raise questions because you are not tying your tax return to the 1099K.  The IRS assumes everything reported on the 1099K is taxable income and the way you explain that much of it is reimburseable parts is to records those parts as an expense, which is supported by your detailed record keeping. 

[Critter-3 · Accepted solution]

You should be reporting the $1,000 as income and then $800 as an expense on Schedule C.  Thus it nets to the  $200 of taxable income for the labor and will match  to any 1099Ks that you receive.   This has ALWAYS been the correct way to file a Sch C ... so nothing has changed with the new 1099-K reporting requirements.  All these parts you are "reimbursed" for can be entered on the Sch C as supplies thus you can skip the inventory section since these are not an inventory you carry.  

[dg_enterprises]

Thanks all for the replies. 

The bottom line for me is that I will no longer accept electronic payments. 

[Critter-3]

No matter how you get paid you must include everything you are paid (gross income) on the Sch C and simply expense the supplies (net income).    That is the correct way to file the return per the IRS regulations.  Keep accurate records in case the IRS ever audits you.