Tip Jars and the IRS. (Updated)
Cousin Jack, who is a Tax Law Professor, considers whether the “donations†that bloggers receive in their online “tip jars†are reportable as income for tax purposes. Jack concludes that such “donations†are reportable as income, and he points to a site laying out the reasoning behind this conclusion.
Stripped of detail, here is the deal. If the money people place in the online tip jars is deemed to be a gift, it is not reportable as income. If, however, it is viewed much as the tips given to cab drivers or waiters and waitresses, it is taxable income. The cited case law suggests that the government would consider such online “donations†to be analogous to tips given to waiters and waitresses or dealers at a casino and, as such, are reportable.
Memo to Andrew Sullivan: Call your accountant!
Update: I had originally posted the following thoughts in the comments, but I decided to put them here instead.
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Not having a tip jar, for me, this is merely an interesting academic exercise. Having thought about this a bit more, I sense that the government either doesn’t consider (or only pays lip service to) the intent of the “donor.” Were it to examine the intent of the donor, I think the conclusion might change for certain “donations.” Consider a couple examples where the intent of the donor is more apparent.
1. Suppose a Joe Blogger, with a tip tar on his blog, does a post in which he mentions that it is his birthday. Further suppose that reader X deposits $25 tip in the tip jar along with a comment saying “Happy Birthday, Joe Blogger!” Gift or “taxable tip”?
2. Suppose that Josephine Blogger posted a blog about a recent financial setback in her life, and, after having been moved by the post, a long-time reader deposits $25 in the “tip jar” along with a note saying, “This is for you. I hope things turn around for you.” Gift or “taxable tip”?
I think, in both cases, it is clear that the donor intended the money as a gift, and I think that their intent should control. However, making such determinations would require a donation-by-donation examination by the IRS, which would make administration a nightmare.
Fortunately for the IRS, I doubt that Joe or Josephine Blogger would bother going to the mat over the tax on $25 (particularly so, if they were conscientious enough to report it to the IRS in the first place). However, what if the gifts to Joe and Josephine had been $25,000 instead of $25, a sum worth arguing about? I think on those facts they’d win.
So, what really is the intent of the people who make deposits into blotters’ tip jars, and should it matter? Suppose a blogger’s tip jar contained “donations” from 1,000 readers of $5 each and that all 1,000 were prepared to march off to the IRS office with the blogger to swear that they intended their $5 strictly as a gift, with no strings attached and in anticipation of nothing in the future. Again, on those admittedly tortured facts, I think the blogger wins.
Waddya say one of you fine folks sends me $25K on my next birthday, and we’ll test my theory. Hell, I know a good tax lawyer.
I would beg to differ with the honorable Professor: for those that blog for recreation/amusement, I would think any tip jar contributions would be considered gifts: _unlike_ taxi drivers, waiters/waitresses, etc, blogging is not a part of our professional lives.
If I ever get any money for the GoogleAds I have on my website, I’ll consider *that* “income”, but someone sending me $5 because they liked something I wrote is another matter, entirely.
But that’s just me – I’m not a Law Professor or the IRS 🙂
Comment by DMerriman — February 17, 2005 @ 12:36 am
Does this mean I can write off my hosting fees? How about if I itemize my time spent blogging? There’s always a silver lining, Jim!
😉
Comment by zonker — February 17, 2005 @ 12:40 am
Does this mean that I don’t have to worry about the IRS coming after me since I don’t have a tip jar? Well… even if I did have a tip jar, I can’t imagine anyone even putting anything in it… Which is why I don’t do blog-ads since they’d see my traffic numbers and say “why bother”… never mind – time to go back to looking at my real tax stuff.
Comment by Teresa — February 17, 2005 @ 3:18 pm
Ok, how’s about ya call it a “gift” jar instead of a tip jar? Would that change anything? Even if it WAS 25K?
Comment by Pammy — February 17, 2005 @ 3:19 pm
My Funk and Wagnall defines tip as an optional payment given IN ADDITION TO a required payment. That is the way I have always thought of it. If a blogger isn’t getting paid a required payment for services rendered, then any moneys given to the blogger must be a gift. Don’t you wish I made(made up?)the rules for the IRS?
Comment by Bob — February 17, 2005 @ 3:31 pm
Well if you set up two jars, ‘Gift’ and ‘Tip’ they could only go after the second one, right? Just to make sure people know where to drop the dough, make that ‘Gift’ and ‘Taxable Tip’.
Comment by Mike — February 17, 2005 @ 4:06 pm
IMHO it is not as simplistic as whether they are or are not declarable income. There is the hobby exception involved. If you get $200 in tips a year and you spend $250 on hosting and software (and what about computer costs…), it is nothing more than a partial offset of the cost of a blogging hobby, just like any hobby you never really make money off of enough to call a business.
By the same token, even if you are taking in less than you are spending, if you can say your *intent* is to make money through tips, ads, whatever, you can start declaring the revenue and the expenses and whatever net result that comes to. Traditionally the IRS wants to see you show a profit some years so they know you’re for real, but apparently even that is not absolutely imperative if the intent can be sufficiently shown.
Me, I would not declare it if it were below or not much over my costs, if my intent were not to profit from the blog, and it could be easily defended as a gift or as money helping to offset the cost of a hobby.
If I were setting out to get lots of contributions, running ads, selling sponsorship, and intending to make the blog a net generator of cash, I would probably declare it even if a loss existed initially or in a given year. Making sure to keep track of the relevant expenses just as if it were any other business.
Comment by Jay — February 18, 2005 @ 7:06 pm