So I was studying for my enrolled agent exam the other day and came across an interesting bit of information that I doubt many people know. If you host a sales party or product party (the kind that Pampered Chef, Tupperware, and others like them depend on), then you’re legally required to include any gift or gratuity you receive in your income. Here’s what the IRS says:
If you host a party or event at which sales are made, any gift or gratuity you receive for giving the event is a payment for helping a direct seller make sales. You must report this item as income at its fair market value.
Your out-of-pocket party expenses are subject to the 50% limit for meal and entertainment expenses. These expenses are deductible as miscellaneous itemized deductions subject to the 2%-of-AGI limit on Schedule A (Form 1040), but only up to the amount of income you receive for giving the party.
– From the Other Income section of IRS Publication 17
I have a feeling the IRS is missing out on tons of revenue due to all the under-reporting that happens as a result of these parties!
What Happens If You Don’t Tell the IRS?
Now, obviously, the IRS isn’t going to lock you up if you forget to include this income on your tax return. But if you are audited and the IRS agent can somehow figure out that you hosted such a party and received cash or items for hosting, then you will have to increase your income, pay additional taxes, and possibly pay a 20% tax penalty.
But now you have a problem. You know about this tax rule and you should follow it. That’s going to sound ridiculous to some people, and I’m not saying our current tax system is great or makes sense. But as Christians, we must follow the laws of the government that is over us unless those laws would force us to act contrary the laws of God. This is a matter of conscience and our witness to the world – not an issue of whether the law is stupid.
I doubt income tax laws will ever cause us to violate God’s commandments, so our aversion to an admittedly silly law is mostly because we don’t want to do it. And that’s not a very good excuse (and not one the IRS will accept either!). So as crazy as it sounds, we ought to follow these laws and report our income accurately as the IRS requires.
What Do You Think?
I know most of you will think this is a dumb rule. I agree with you. But it’s still a dumb rule we ought to follow. My question is this: Now that you know, are you going to report this income on your tax return? Let me know in the comments below!
P.S. I’m not going to report you to the IRS either way…I just thought it would be interesting to discuss!
photo credit: (Athenamama on Flickr)
This post was included in the Carnival of Financial Planning.
Paul,
Thank you for informing your readers! I did not know that… Of course, now I will avoid having parties so I do not need to go to all the trouble of reporting them.
I am a tax preparer at H&R Block, and I find it amazing how many people want to fudge on their taxes. I sold Avon a few years ago and recruited my best friend to sell Avon also. The lady that trained her actually told us that if Avon does not send you a 1099, you are not obligated to pay taxes on income earned from Avon. And she is a top seller in the district! I couldn’t believe it.
Thank you for encouraging honesty. I believe truthful reporting on your taxes is a matter of Christian integrity as well as “giving to Caesar what is Caesar’s.”
You’re welcome, K! I just thought it was interesting and kind of funny. But as stupid as it may be, it’s still our responsibility to follow the laws. And as Christians, we’re clearly called to do so. I don’t think there’s any option for a Christian who wants to follow Jesus to fudge on their tax return and not report something they’re supposed to (or to over-report deductions/credits). Thanks for commenting!
Now I have a real good reason to not have a party for all my friends who have parties! This is another example of how convoluted our tax system is and how honest people can make mistakes and not even know it. Sad.
Hahaha! I’d like to see the person’s face when you tell them this is why you don’t want to host a party. I agree about our tax system – it needs to be drastically overhauled!