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Hi I have users that are submitting content that can be rated by the community. The top users, based on the popularity of their contributions, accumulate points in their account that (for now at least) translate to a cash amount. After a certain cash threshold users can 'cash out' and get paid the amount via Paypal. This will eventually turn into a reward system from partners, but for now and the foreseeable future it will be cash.

Do I need to do anything regarding taxes, or can the responsibility be on the users to report their earnings as part of their regular income statement and deal with it themselves?

Thanks in advance!

How about this, what if it's not cash but Amazon gift cards or some equivalent. Would that make a difference?

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Two caveats:

  • I live in the US, and so my advice only applies to the US.
  • I'm not an accountant or attorney.

I believe there is a threshold. If the cash earned by the user is under a certain amount, you don't have to do anything. But if it is over that amount, you will have to report it to the IRS. This is how casinos in the US operate. If you make $50, for example, the casino doesn't report it to the IRS, and it is on you to report it. But if you make $5000, for example, the casino is obligated to report it to the IRS - probably in the form of a 1099. I don't know what that threshold is, but my guess is that your website won't be distributing that kind of cash.

what if it's not cash but Amazon gift cards or some equivalent. Would that make a difference?

Substituting a gift card for cash doesn't make a difference. It's like winning a car on a game show. You will have to assign a cash value to that item and treat it as if it were cash. Gift cards are easy, if you give away a $25 Amazon gift card, the cash value is $25. Other things, like a laptop for example, are more subjective. But the same rules apply, if it is under a certain dollar value you don't have to worry about reporting it to the IRS.

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Thanks so much for the response. This is all for a website that will be launching in the states in the next couple of months. Right now the threshold is $20, but top users could theoretically make a few thousand in a month. Can 1099s be written without the tax ID number of the person (these users are just people using a website, not companies, and will probably not have tax IDs). I'm basically paying top users based on the popularity of their contributions - unofficial 'employees' if you will. Thoughts in this context? – Marc Sep 24 '10 at 15:22
An individual's tax ID is his/her social security number. Corporations don't have social security numbers, so they need to use a tax ID (sole proprietors can use their SSN or register for a tax ID). But if you are only giving away $20 at a time, I don't think you have to worry about 1099s...that's too small of a number. Again, I'm not a lawyer, so you may want to verify this. – Zuly Gonzalez♦ Sep 25 '10 at 3:56
I updated my answer to respond to your question about gift cards. – Zuly Gonzalez♦ Sep 25 '10 at 3:58
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I'm no attorney nor accountant and so seek out appropriate advice from a CPA or attorney on the matter.

This depends on jurisdiction and the laws applying. So doing business in Europe where there is a VAT (I don't know if it applies or not just think about the physical location of you and the party doing the work to determine jurisdiction). In general the answer is you don't have taxes here because they are not empoyees. There maybe a sales tax in limited jursidictions that you would be obligated to pay.

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