Tiny Business Taxes for Software Sold

December 29, 2010 12:45 PM

How should I be reporting Google Checkout and PayPal Express Checkout income and expenses to the IRS in 2011 for the 2010 tax year?

This year I started selling an online software product using Google Checkout and Paypal Express Checkout. I'm going to be working with an accountant, but I'd like to enter the conversation with said accountant semi-educated. You are not my accountants, you are internet friends giving me informed opinions.

First Question: As I understand things (and please correct me if I'm wrong) neither Google or Paypal will issue me a 1099. Instead it's my responsibility, acting as a business, to keep track of sales for the year and report this as income on a Schedule C form. Is this correct?

Second Question, two parts: Both Google and Paypal charge a small percentage as a processing fee. When I'm reporting my income and expenses related to this

1. Should I be reporting the total sales prior to the processing fee being deducted, or reporting the total sales after the processing fee is deducted?

2. If I'm reporting the total sales prior to the processing fee being deducted, am I able to deduct the processing fee as a business expense?

Final Question: Are there any other gotchas that someone used to filing a Schedule C for 1099 consulting/contracting work should lookout for in the products world?

posted by alan to work & money (9 answers total)

Yes, this sounds like a schedule C situation, regardless of whether you get a 1099 or not.

You should report GROSS revenues, then show the fees as a business expense. Yes, it's deductible.

Undoubtedly there are other gotchas, but all my schedule C experience is in providing services.

You probably should consider a CPA.
posted by randomkeystrike at 12:55 PM on December 29, 2010

@randomkeystrike Thanks! As mentioned, an accountant has already been retained, but I'd like some background information as many "non-traditional" internet businesses bring up questions that CPAs often have differing opinions on.
posted by alan at 1:24 PM on December 29, 2010

Oh, sorry I missed that. Yeah, this should be straightforward. The fees are a cost, just like paying an ISP or a shipping clerk.
posted by randomkeystrike at 1:43 PM on December 29, 2010

Yes, the simplest way to do this is a Schedule C. You report gross sales on one line. Then on subsequent lines you list all of your expenses that you can deduct from your gross sales. Among those expenses would be any fees you have to pay. Also you deduct the amount you paid for any goods that you sell. You may also be able to deduct certain expenses such as computers, advertising, telephone, etc. Essentially any expenses you paid to support your business. It is important that you claim every possible legitimate deduction because it will reduce your net taxable income. This is important because, even if you have a low income with no income tax, you still have to pay both halves of the FICA tax.

You may also be eligible to deduct home office expenses -- a portion of home rent, mortgage, maintenance and utility bills.

If you don't have a regular job with a health plan, you may be able to deduct health insurance premiums for a plan that you get for yourself and family.
posted by JackFlash at 4:41 PM on December 29, 2010

Yup, 2nd'ing reporting sales gross and showing the fees as a processing expense. Starting in 2011 you WILL likely get a 1099-K. This is a new form that will report your sales and be filed with the IRS as well to ensure that you pick up all your income.

Some thoughts:

I've heard some folks say that they'd rather incorporate and file a separate return for their business instead of filing a Schedule C with their 1040. Their theory being that returns with Schedule C's are examined more frequently and they don't want to draw unnecessary attention to their individual return. I don't know if I agree. Forming a separate company will have more administrative costs, plus the IRS is looking at S-Corps more and more these days.

Oh, BTW, the new tax package just passed includes 100% bonus depreciation, meaning you can entirely expense certain equipment purchases made after Sept 8th! It will continue for 2011 too.

Also, unrelated - make sure you're aware of are the hobby loss rules which could limit your ability to deduct losses from your online businesses depending on the circumstances surrounding the activity.

So those are some informed thoughts - but of course, not advice :-) As I'm sure you know, this is all so dependent on your individual facts and circumstances. Good luck with the biz...
posted by MediaMer at 4:43 PM on December 29, 2010

Quick FYI regarding JackFlash's comment: you do pay both parts of the FICA (7.65% Employee tax + 7.65% Employer tax) on any net income, but you also get to deduct half of that as an expense.
posted by MediaMer at 4:52 PM on December 29, 2010

you do pay both parts of the FICA (7.65% Employee tax + 7.65% Employer tax) on any net income, but you also get to deduct half of that as an expense.

This is misleading. You don't deduct 1/2 of SE tax as an expense on your Schedule C. You take 1/2 of SE as a deduction against income for your adjusted gross on your Form 1040. Depending on your taxable income and tax bracket, this may or may not reduce your taxes. But regardless, you must pay the full SE tax. That is why expenses are so important on the Schedule C.
posted by JackFlash at 5:29 PM on December 29, 2010

@MediaMer Thanks for the 1099-K info. I'd heard rumblings about something like that and was curious if they applied/existed yet.
posted by alan at 5:41 PM on December 29, 2010

Sure enough - in fact I even got an email from ebay about it. The minimum for having a form issued to you is 200 transactions or $20,000 in sales, though I suspect some processors may issue them even below those thresholds just to cover themselves.
posted by MediaMer at 5:53 PM on December 29, 2010