Q: What legal consequences will I be facing, come tax season, for using crowdfunded money to pay a friend for work?
I don’t have a business and will be using money gained from crowdfunding, to pay a friend to help me develop an animated feature. Will there be any differences if I were to make this animated feature available to the public free of charge or selling the feature when it is done? What legal obligations will I face when tax season comes?
A: Very likely the money received via crowdfunding will be taxable income to you. If you don't have an entity, then you would report it as a sole proprietorship income on a Schedule C. Keep in mind that you can claim ordinary and necessary business expenses to offset the income. For example, the amounts paid to the animator would be deductible. And you would need to issue a Form 1099-MISC reporting the amounts paid.
Whether you sell the feature or offer it for free will not change the whether the crowdfunded income is taxable. If you do sell the feature, then any revenue/sales would need to be reported as income as well.
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