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I write articles on my website and collect donations from anonymous people on the Internet via PayPal. I end up with a fair bit of income that way each year, but it's never a large amount, so I'd always file my "business income" based on what I cashed out of my PayPal account, and it's never been an issue after all these years.

However, last year was particularly successful, and I cashed out quite a lot of money. A significant enough amount that it may potentially throw a red flag, since it's vastly greater than the ballpark amount I usually file.

Now the issue is, although I can continue to file as I always have, I don't actually have any business invoices to provide to back this income, due to the nature of the money being donations. The only documentation that I could provide would be my bank account transactions, and the PayPal withdrawals shown on them.

On the PayPal side, they aren't marked as Goods & Services; they're just direct credits marked as "Donation" in the notes. Hence, I don't have any details about the senders of the donations either. The best I could provide would be a summary of all the credits I received and debits I performed in my PayPal account.

In this particular scenario, what should I do to cover myself during any potential auditing? I'm fully prepared to file the taxes on all of the money I cashed out, that's not an issue. I'm not trying to evade taxes or anything. The issue is that I don't have any meaningful documentation to provide in case the government asks, "Where did this money come from?" I don't have any paper trail to provide; only my word for them to believe.

Also, even if I do get by last year's return scot-free, subsequent years will be hazardous as well, as I may not make nearly as much as I did last year. So it will suddenly be a nose dive in income, which would again be a red flag.

Thank you for taking the time to help.

4 Answers 4

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I am not an accountant. My understanding of the US tax system is that as long as you are paying the taxes when due, the chance of an audit is low. Business income goes up and down a lot. I don't believe that one year with high income is by itself a red flag nor the following year being much lower. Just look at the last few years of ExxonMobil where they went from losing money to record profit. You also can print out the PayPal list of "donations" so that you have a record of where the money came from. Unless you have a criminal history or the donations are from people in criminal activities in order to "launder the money", that should be enough.

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I have worked as a freelancer in France, where freelancing requires obtaining obligatory microentreprise status, paying taxes, and passing all the revenues via a dedicated bank account, so the question of issuing invoices (facture in French) to clients found online readily poses itself.

The usual practice here is to write up a standard invoice (one copy for the client and the other copy for one's records) and simply send the one destined for the client to a generic address, or throw it away or whatever. The point is that all the income coming to the professional account should be traceable via one's records (i.e., the kept copy of the invoices.) These have to be made according to standard rules - making all the necessary obligatory mentioning, specifying the nature of job, the time-frame, specifying the taxes paid, VAT, etc. Importantly, there should be a consistent system of enumerating the invoices - to assure that there are no gaps.

The question actually doesn't pose itself with clients found through the French freelancing sites, since those usually do all the necessary paperwork (from issuing the initial devis=price quote to the final facture=invoice.)

Another catch is that freelancing status may involve other taxes, besides the income tax - as, e.g., taxe foncière=property tax, for the office used for work, which applies even if one works from home. There are some nuances in terms of having dedicated working space or not declaring too many square meters, if working from a shared space, like one's living room, but this is very country-specific.

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In Brazil, we have multiples sources of information coming from all sorts of companies, enterprise, shopping, public services, medical , etc and this allows the government create a trace of every citizen that is integrated in a moden society. In brazil we almost never uses paper money, mainly in the biggest cities, cause we have a way of transfering funds in a universal way called PIX. A pix is a phone number or randim uuid that is the key we use for transfering money to other people, to gorceries, market places, stores, and this is all traceable. Each amount entering in your bank account have a source, that has another source, etc and its fully traceable All provents (received payments) and all our expenses are fully traceable. So, independent of your declaration/ formal statement, in Brazil you could received a visit of the agents that serves to the RECEITA FEDERAL. If I was you, I would be honest and tell the autorhites the truth, because if not, the bank will dismiss you First, is an act of good will, proving you have good intentions, and has nothing to hide.

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First thing you need to do is determine whether what you are doing is considered a hobby or a business according to the IRS, and if similar rules apply in your state. For a hobby, you don't need to pay SE taxes (including quarterly payments), because it gets reported straight to Sch. 1, not Sch. C.

If your income is treated as business income, then you need to do two things:

  1. File a Sch. C with your tax return, and calculate your gross profit (income - expenses allocated to the business) and then determine your SE tax liability.
  2. For future years, forecast your gross profit and what your anticipated SE liability is, then make quarterly payments.

You need to repeat this process with the state income as well.

As for determining what you actually owe, you need to calculate any expenses attributable to the business and subtract those from the income the business earns to determine the business' profit. Since you aren't incorporated, all business income passes through to you, so you have to pay SE tax on the entire profit, in addition to any income tax you pay for your regular job(s).

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