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I have a perculiar situation. Two years ago I "met" a guy from India on freelancer.com. He wanted help setting up an Ebay store and PayPal account. Since he is foreign, the accounts were set up in my name to allow more flexibility. The agreement was that I would get 10% income on sales after Ebay and PayPal fees. Not really thinking anything of it, we set it up and for the first few months nothing was happening. Then, all of a sudden it went from me getting $50 a month to $400 to $800 because he is making sales. I don't do anything except manage the two accounts.
When I saw the $400 deposit into my bank account in November, I got nervous, especially with the new 1099-K form out there. I will not get a 1099-K in 2011, but will in 2012 if we continue this.
My CPA friend told me to do a Schedule-C. All the reading I've done basically says to keep track of expenses etc that I don't have. The guy is basically an agent doing all this.
I want to pay taxes on my actual income I received from him and continue to do this, but I also want to do it right. What are my options?
You are running a business in 2011 anyway you look at it. You will not receive a 1099 for that income but there is a place to claim receipts not reported on a 1099. Look for that and claim this $400 there.
It sounds like you might have a pretty sticky situation. The problem is that eBay is not going to report your 10%, but they'll report ALL the sales as gross income. I also sell on eBay and my 1099 from Paypal showed only gross receipts. You'll have to show Paypal's fees, Ebay's fees, and any expenses, costs of goods sold, etc. You'll have to show and claim all expenses and prove that the rest of those profits isn't yours, but someone from India's.
You should talk to an accountant with international tax experience. Its possible the guy is using your account for fraudulent/illegal purposes to prevent withholding on his US earnings and then not paying US Federal income taxes.
Location: East of Seattle since 1992, 615' Elevation, Zone 8b - originally from SF Bay Area
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The IRS will usually let you slide the first year but you are going to have a big hit with the tax bite. Next year you will have to send in quarterly estimated tax payments and have a business tax ID or they will fine you and charge interest. That's for any legitimate business, Ebay or otherwise. In this case you could be participating in some kind of illegal activity like laundering drug money, or being set up for a scam. I would not be doing business with a stranger from India.
I'm not so worried with the seller being "legit" or not. He's obviously making a product or service that sells and he's giving the OP 10% for using her name to open an account in the US to make it safer and easier to market to US buyers. Everything sounds straightforward and legit so far and the OP isn't having any trouble getting her 10% for doing absolutely nothing other than creating the name on the account to begin with.
The issue is that neither the IRS, or eBay and Paypal knows what is going on. All they know is the OP made an X amount of dollars last year and they're going to get taxed on it. Period.
As an example:
Sales on eBay account: $20,000
Costs of goods sold:
Paypal fees $1000
Ebay fees $2000
Net income: $17,000
Taxes at 30% bracket rate: $5100
Income OP actually got for commissions (10%): $1700
The op is out of pocket in this scenario since he's paying taxes of $5100 when he only actually took 10% as commissions. Trying to prove phantom partners in another country can be difficult especially when the IRS can't prove the citizenship of someone from another country. I could just easily make up a name in the Cayman Islands, wire my money over there and say it's for my partner and I only should be taxed for the measly 2% commissions that I'm getting. You see what I'm getting at? To the IRS, it sounds like you're evading taxes.
I'm not so worried with the seller being "legit" or not. He's obviously making a product or service that sells and he's giving the OP 10% for using her name to open an account in the US to make it safer and easier to market to US buyers. Everything sounds straightforward and legit so far and the OP isn't having any trouble getting her 10% for doing absolutely nothing other than creating the name on the account to begin with.
The issue is that neither the IRS, or eBay and Paypal knows what is going on. All they know is the OP made an X amount of dollars last year and they're going to get taxed on it. Period.
As an example:
Sales on eBay account: $20,000
Costs of goods sold:
Paypal fees $1000
Ebay fees $2000
Net income: $17,000
Taxes at 30% bracket rate: $5100
Income OP actually got for commissions (10%): $1700
The op is out of pocket in this scenario since he's paying taxes of $5100 when he only actually took 10% as commissions. Trying to prove phantom partners in another country can be difficult especially when the IRS can't prove the citizenship of someone from another country. I could just easily make up a name in the Cayman Islands, wire my money over there and say it's for my partner and I only should be taxed for the measly 2% commissions that I'm getting. You see what I'm getting at? To the IRS, it sounds like you're evading taxes.
This is what I was afraid of The money gets sent out of my paypal account to about 5 other paypal accounts every week, the other paypal accounts are his partners. If the IRS ever asks, I can't give them those accounts? showing that the money is not being routed to me and is not my income? I talked to a CPA friend of mine and he told me to make sure I don't get a 1099-K and claim my 10%, this way the IRS really has no way of knowing my gross sales. I know this is all risky, but the product is legit and when I first started doing business with the guy, he wanted the accounts in my name because he would be under too many limits in his country and wouldn't be able to do business as easily. I did research this and it is true.
I just never expected it to be this way. I was thinking $100 a month max....
This is what I was afraid of The money gets sent out of my paypal account to about 5 other paypal accounts every week, the other paypal accounts are his partners. If the IRS ever asks, I can't give them those accounts? showing that the money is not being routed to me and is not my income? I talked to a CPA friend of mine and he told me to make sure I don't get a 1099-K and claim my 10%, this way the IRS really has no way of knowing my gross sales. I know this is all risky, but the product is legit and when I first started doing business with the guy, he wanted the accounts in my name because he would be under too many limits in his country and wouldn't be able to do business as easily. I did research this and it is true.
I just never expected it to be this way. I was thinking $100 a month max....
Claim those 5 paypal transfers as business expenses and issue 1099's....
you are in a sticky situation for sure, this arrangement is not good!!
Sigh, I guess my best bet is to end all this. Although the money is really helpful right now with my debt load
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The money gets sent out of my paypal account to about 5 other paypal accounts every week, the other paypal accounts are his partners. If the IRS ever asks, I can't give them those accounts? showing that the money is not being routed to me and is not my income? I talked to a CPA friend of mine and he told me to make sure I don't get a 1099-K and claim my 10%, this way the IRS really has no way of knowing my gross sales. I know this is all risky, but the product is legit and when I first started doing business with the guy, he wanted the accounts in my name because he would be under too many limits in his country and wouldn't be able to do business as easily. I did research this and it is true. 
