How should I handle taxes for Minecraft server donations?
"Technically, this is considered ""income"" for you, and is actually not considered a ""donation"" for your donors, but is instead a ""gift"" (not tax-deductible for your donors). So, you are technically required to report it, and there is a pretty significant audit trail that can be followed to prove you made that money. I don't know if PayPal is required to file 1099s for payments received, but if you've ever received such a document, so has the IRS, and they'll match it to the income you claimed and see a discrepancy, triggering an audit. Depending on the amount that it affects your taxes (it can be significant; if you have a  $50k/yr day job, you'd owe the government 25 cents on every dollar donated), they can let it slide, they may simply dock your next return, or they may come after you for interest and penalties or even charge you with criminal tax fraud if they could prove you maliciously attempted to conceal this revenue. Now, if you already itemize using a Schedule A, then you can erase this income by deducting the costs of the server, not to exceed the amount of the donations. The best you can do is offset it; you cannot use this deduction to reduce taxable income from other sources. Also, you must itemize; you can't take your standard deduction, and with a maximum possible deduction of the actual costs of running the server ($1500, IF you receive enough donations to fully pay for it) compared to one person's standard deduction ($5800), you'll want to take the standard deduction if you don't have other significant deductions (medical expenses, mortgage interest/property taxes, etc). If you were charging users a monthly fee for use of the server, then you've basically created a de facto sole proprietorship, and you would still have to count the fees as income, but could then deduct the full cost of running the server. You'd fill out a Schedule C listing the revenue and expenses, and back them up with statements from your ISP/hosting company and from PayPal. Now, this would apply if you were running the server with the primary goal of making a regular profit; Schedule C cannot be used for income from a ""hobby"", undertaken primarily for enjoyment and where a few bucks in revenue is gravy. Whether you think you can get away with that in your current situation is your prerogative; I don't think you would, given that the donations are solicited and optional, and thus there is no expectation of ever turning a profit on this game server." "Its is considered a ""hobby"" income, and you should be reporting it on the 1040 as taxable income. The expenses (what you pay) are hobby expenses, and you report them on Schedule A (if you itemize). You can only deduct the hobby expenses to the extent of your hobby income, and they're subject to the 2% AGI threshold." "First to clear a few things up.   It is definitely not a gift. The people are sending you money only because you are providing them with a service.   And for tax purposes, it is not a ""Donation"". It has nothing to do with the fact that you are soliciting the donation, as charitable organizations solicit donations all the time. For tax purposes, it is not a ""Donation"" because you do not have 501(c)(3) non profit status.   It is income. The question is then, is it ""Business"" income, or ""Hobby"" related income?   Firstly, you haven't mentioned, but it's important to consider, how much money are you receiving from this monthly, or how much money do you expect to receive from this annually?   If it's a minimal amount, say $50 a month or less, then you probably just want to treat it as a hobby. Mostly because with this level of income, it's not likely to be profitable. In that case, report the income and pay the tax. The tax you will owe will be minimal and will probably be less than the costs involved with setting up and running it as a business anyway. As a Hobby, you won't be able to deduct your expenses (server costs, etc...) unless you itemize your taxes on Schedule A.   On the other hand if your income from this will be significantly more than $600/yr, now or in the near future, then you should consider running it as a business.   Get it clear in your mind that it's a business, and that you intend it to be profitable. Perhaps it won't be profitable now, or even for a while. What's important at this point is that you intend it to be profitable.   The IRS will consider, if it looks like a business, and it acts like a business, then it's probably a business... so make it so.   Come up with a name for your business. Register the business with your state and/or county as necessary in your location. Get a bank account for your business. Get a separate Business PayPal account. Keep personal and business expenses (and income) separate.   As a business, when you file your taxes, you will be able to file a Schedule C form even if you do not itemize your taxes on Schedule A. On Schedule C, you list and total your (business) income, and your (business) expenses, then you subtract the expenses from the income to calculate your profit (or loss).   If your business income is more than your business expenses, you pay tax on the difference (the profit).  If your business expenses are more than your business income, then you have a business loss. You would not have to pay any income tax on the business income, and you may be able to be carry the loss over to the next and following years. You may want to have a service do your taxes for you, but at this level, it is certainly something you could do yourself with some minimal consultations with an accountant."
Yes. W4 determines how much your employer will withhold from your wages. Leaving everything at default would mean that your salary is your only taxable income, and you only take default deductions. Your employee will calculate your tax withholding based on that. But, if your salary is >200k, I assume that you have other income (investment/capital gains, interest on your bank account), which you will have to pay taxes on. You're probably going to have some deductible expenses (business/partnership expenses, mortgage interest, donations, college funds etc) as well. So it is very likely, unless you're really not smart about money, that you have more to do with your taxes than just the employers' withholding. According to HMRC's manual BIM42105, you can't deduct expenses of this kind when calculating your profits for corporation tax: No deduction is allowed for expenditure not incurred wholly and exclusively for trade purposes So at the least, the company will have to pay corporation tax on this donation at some point, assuming it ever makes any profits. There's also the risk that HMRC would say that what is really happening is that you are making a personal donation to this person and the company is giving you income to allow you to do it. In that case, you'd be liable to income tax and employees national insurance, and the company liable to employers national insurance. It should then be deductible from corporation tax, though. "You're calculating it exactly right. I wrote about this one on my blog a while ago. Lesson learned is that nothing comes for free, and you can take the saying ""there are no free meals"" quite literally in this case. edit To address the comments about tips... I don't believe tips should be compulsory. Its my reward to the server for outstanding service. Not part of the cost of the meal. If its part of the server's salary - then I prefer not to dine in such a place (and at least in some places its illegal to consider tips as part of the salary). The coupon in question explicitly requests tipping the server. Thus, the tips with or without the coupon are still expected, and that's why I'm not taking them into the consideration. According to the laws of the State of California (where I live), mandatory charges, such as the 18% gratuity charge required by the coupon, are not tips, and don't have to be passed on to the employees. Thus, employees will still expect my tips on the bill, so I'm basically required to tip twice, when using the coupon." "If you are in the US, you legally must file taxes on any income whatsoever.  How much you will pay in taxes, if any, will depend on your total taxable income. Now, for small transactions, the payments are often not reported to the IRS so some people do not file or pay.  The threshold at which they payer is required to send a 1099 to the IRS is $600.  Patreon considers each donation a separate transaction and therefore does not send a 1099 to the IRS unless you make more than $20,000 in a calendar year.  If they do not report it, the IRS will not know about it unless they audit you or something.  However, you are technically and legally responsible to report income whether the IRS knows about it or not. -------- EDIT ------- Note that the payer files a 1099, not the recipient. In order to report your patreon income you will either use schedule C or add it to the amount on 1040 line 21 (""other income"") depending on whether you consider this a business or a hobby.  If it's a business and it's a lot of money you should consider sending in quarterly payments using a 1040-ES in order to avoid a penalty for too little withholding." "Depending on what your other deductions are and the amount you are wanting to donate, you can save some money by ""batching"" deductions into every other year. For example, if you are single in 2015, the standard deduction is $6,300. This means the first $6,300 in deductions you have basically don't ""matter"" because the standard deduction is larger. You only ""count"" itemized deductions greater than $6,300. Let's imagine you are donating $10k in 2015 and 2016 and have no other itemized deductions. If you donate in both years, you basically get a net deduction of ($10,000 - $6,300) * 2 = $7,400 over the standard deduction. However, if you donate $10k in 2015 and the next $10k on Dec31, 2015, then you now have donated $20k in 2015 and $0k in 2016. This affects your taxes because you now get ($20,000 - $6,300) = $13,700 in ""bonus"" deductions. You still get the full $6,300 standard deduction in 2016 as well. This can be a significant impact on your taxes (especially if you are married as the married deduction is double the single or have minimal other itemizable deductions).." In the United States investing towards donation is a great idea because you can donate appreciated securities directly rather than donating cash.  Notice how much this can benefit you: So you get to both (a) donate untaxed money and then (b) deduct that unrealized money from your income total on your tax return. With the above in mind, a good strategy for investing towards this type of donation would be to pick securities that are likely to increase in market value but not likely to produce any other sort of income.  So bonds (which produce lots of interest income), or stocks with dividends, or equity mutual funds (which distribute dividends as capital gains) would all be suboptimal for this purpose. Of course, an even better strategy would be to establish a widely diversified investment portfolio without thought to future donations.  Then, once a year (or whenever), evaluate all your investments and find some where the market value has increased.  Then donate some of those shares.  No special advance planning necessary. Note that your tax consequences could be more complicated depending on your exact situation.  Read the section about Capital Gain Property in IRS Pub. 26 for all the details.  There may be special limits on the amount you can deduct.  Also, donations of short term capital gains are treated much less favorably, so make sure you donate only long term capital gain property. "To echo part of stannius' response. If it's taxable, there would be tax on $19,999, just a bit less than on $20,000. Your uncle may have a credential, and members here may not, but still he may be mistaken. Or he could be giving you advice on how to skirt the law.  The taxability and the $20,000 threshold are unrelated! Trying to 'avoid' the   $20,000 is a completely misplaced effort. Gifts from anyone are not taxable to the recipient. So long as nothing is received in return, it's not taxable income to her. In contrast a blogger with a ""tip jar"" is soliciting money in exchange for advice, entertainment, etc. that's taxable. Donations to individuals, in the circumstance you describe are not income to her, nor are they deductible to the donor.  Edit - a fellow blogger (more than that, she's my tax crush) had an article Cancer survivor gets $19,000 tax bill for GoFundMe donations which may render my answer incorrect. Other article on this story suggest that the IRS is notified, but the nature of the transfer needs to be addressed.  In my opinion, you should find a new uncle CPA." "If I understand you correctly, your logic goes wrong right at the beginning. It sounds like you think one could avoid the income tax that would otherwise be owed to the US because of earning the money that was sent as a gift. That's not normally true. From the IRS's Gift Tax FAQ: May I deduct gifts on my income tax return? Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions). So the person who sends $10k to their parents doesn't pay any less income tax than if they had kept the $10k in the US, or had just send the $10k overseas directly to their own bank account. Gifting and re-gifting didn't accomplish anything from the point of view of IRS taxes. You may have been confused by the ""annual exclusion"" that's mentioned on that same page. This exclusion is an exclusion for the gift tax. This is a separate tax on gifts, usually paid by the person who gives the gift. If it weren't for the exclusion, one would pay taxes twice on the money sent to their parents: first, when the money is earned, and then again when the gift is given. The exclusion helps avoid this second tax."