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My Crowdfunding Donations to Help a Sick Friend Are 1099-K Taxable Income?

Written by Steve Rhode

“Dear Steve,

My friend’s mother was diagnosed with cancer and died within a few short months. As the end was nearing I started a GoFundMe page for my friend (age 24) who was to become the sole guardian of her TRIPLET siblings. Due to an amazing community effort, $36,000 was raised. All said it was a miracle…except when the 1099k came in my name and I was told to CLAIM the $36,000 as INCOME. I cannot do this!

I did not get one cent of this money and my student loans are income based, so if the family even (very kindly) paid the taxes on the money, my student loan payments would increase by $500 a month, something I just can’t afford.

We are trying to transfer the account to her name but I am at a loss as what to do. I feel that she shouldn’t have to pay taxes on this either, especially when fees were taken out and they netted $33,000, not $36,000. What do we do?!?

Kate”

Dear Kate,

I have to admit this is the first time I’ve run into this issue. In the past I’ve run GoFundMe campaigns to help people but they never crossed the $20,000 and at least 200 transaction level. And apparently those thresholds are really important because they trigger the 1099-K mandatory reporting.

I’m not all that familiar with other crowdfunding platforms like Kickstarter, YouCaring, YouFunding or Indiegogo but I understand this problematic rule is faced by everyone. In my research for this answer the platforms seem to get regularly trounced for not providing much information on this situation.

As I remember, WePay is the U.S. payment processor for GoFundMe and they happen to be one of the few processors that had some very clear guidance on this issue.

It is not the crowdfunding platforms that send out the 1099-K. They have no role in doing that. But the payment processors like WePay, PayPal, Amazon Payments, and others have to report income received under your name to the IRS on a 1099-K. WePay says this is a requirement of the IRS.

According to the information WePay provides, the only time you would not be personally liable for the reporting of funds moving through the account would be if you were the administrator of the account for a business or non-profit.

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But it sounds like that’s not the situation in your case. Your situation sounds like the many other crowdfunded campaigns that people start to help others. The whole point is to do a good thing and to help someone in need.

Jim Buttonnow, a CPA with H&R Block told me, “Crowdfunding is a very interesting topic- the critical issue is whether the money received is or is not considered income. It is becoming an issue because taxpayers are receiving Forms 1099-K for merchant card and third party network payments – if they do not report the income the IRS will question the return.”

The WePay website provides advice that seems to punt this issue down the road and says, “It is up to you (and a tax professional) to determine whether your proceeds represent taxable income. WePay will not report the funds that you collected as earned income.”

This problem with crowdfunding, and this taxable income issue, seem to not be the primary thing people would research and search for when launching a campaign to help someone in need. The 1099-K form catches almost everyone by surprise when it arrives.

Some say the worries might not end with just the reporting of the 1099-K income as federal taxable income, but there is a potential liability for self-employment tax and state tax. If all of us well intentioned folks knew this to begin with, maybe we’d think twice about launching a crowdfunding campaign.

Some good news might be if you and your accountant can come to an agreement and convince the IRS to classify the money received as a gift. If there was no perk given to contributors then some argue the money donated to you was not taxable. Buttonow said, “I have not seen anyone pose the donation as a “gift” – but it would be interesting to see if the the [contributor] papered the transaction as a gift and what the IRS thinks of that argument.”

The TurboTax website has a brief bit of advice on this situation and provides two ways to deal with this. They say, “You can take your stated position that these are non-taxable gifts, since the donors were under no obligation to give this money and they should have been made aware that this was not a deductible charitable contribution, since it was for the benefit of a specific individual.

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You can report this one of two ways:

  1. Print and mail your return and attach a statement explaining that you received a 1099-K for gross proceeds and that the funds were gifts for medical care.
  2. Enter the 1099-K as “miscellaneous other income”, and then make a second entry with a brief explanation and an entry for an offsetting negative amount. This way the 1099-K amount is reported on your return but you’ve explained that it is not taxable.”

The IRS does not seem to provide any specific guidance to taxpayers about this situation. A search of the IRS website for advice on crowdfunding returns 0 documents.

Unwinding this mess to put in the name of someone else name seems to be problematic at best. If you opened the account, and it was registered under your name, the funds were received by you from the payment processor, and it was correctly reported to the IRS; it’s going to take a major effort to change all of that.

What you’d have to do is make the case with the GoFundMe payment processor, WePay and try to alter the past. I would be surprised if they did that retroactively.

When it comes to the issue of need based student loans, I understand the situation. If your application and needs based assistance was manually reviewed and approved by an individual, rather than an automated process, you could make your case and explain the situation.

And it would appear that if your tax preparer went along with the advice given by TurboTax then it would not inflate your final stated income on your tax return and that would keep you safe with the student loan folks.

I can’t stress enough how important it will be for you to get the advice of a qualified tax preparer to assist you in your tax return so this is dealt with properly.

Please post your responses and follow-up messages to me on this in the comments section below.

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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

6 Comments

  • Thanks for this detailed post. I am in the same situation, we accepted donations for a charity in Cambodia with my US paypal account, we gave 100% of the money to this charity, including paying the fees out of our own pocket. Now the IRS want’s back taxes (this was 2014 and paypal sent a 1099k with the donations listed as income, even though they themselves made us send proof that we were donating 100% to a charity!) . It’s such a chore finding someone to talk to at Paypal about this. Is there anything else I can do at this point (besides what is stated above?) Thank you.

    • I would advise that you find a local tax attorney who is licensed in your state and discuss this with them. The PayPal request is completely different than the IRS issue. I suspect PayPal just wanted to make sure you were not going to run a scam on their platform. The IRS is working from the point you received a 1099 and they view you as receiving income.

  • This sounds like what I was thinking and of course a tax accountant and/or attorney will know for certain. If you wanted to be safe, I would get a print out of the individual donations to show that they were less than the allowable “gift” amount ($14000/yr) from each individual and confirm that you are not required to report gifts.

  • I can’t state clearly enough how I am not a tax expert. I don’t claim to be and I’m probably the least qualified person to offer tax advice.

    But, that being said, here is my feedback.

    The 1099-K is issued to the person who is on the payment acceptance account.

    The public information on the second question is sketchy. There is nothing I can find that says the groups don’t report if under the $20,000 or 200 transaction mandatory reporting requirement.

    The 1099-K is issued annually.

    I hope your mom is on the mend.

  • Thanks Steve! I worked with WePay to have the account transferred to my friend who received the money. The 1099k was transferred to her as well. I was given written proof that it will not affect my taxes. Unfortunately, she pays income based student loans as well so I will pass along the information to her to file the form (or not to file 🙂 ). Your advice was most helpful and I truly thank you for your time!!!

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