US game owners, do you pay taxes on revenue from your game?

[edmazur]

I'm guessing the exact method of revenue matters and would imagine donations, advertisements, and virtual goods could fall into different categories. In my case, I'm (going to be) selling virtual goods for $10 USD each through PayPal. I live in the US and the game server is in the US, but other than that there's nothing really tying the game down to a particular country. I'd hate to sacrifice ~30% of my revenue if it wasn't necessary, which leads me to two questions:

1. Do I have to pay taxes on revenue I collect from the sale of virtual goods in my game?

2. If I do, is there some way I can avoid/reduce this? Could I open a bank account in another country or something?

[CygnusX]

Only 2 things in life are certain.  Death and taxes.  Even Al Capone lost to tax evasion.  There are legal means to reducing cost, such as claiming cost of server as a business expense....  but you'll still end up paying a fair amount if your game is successful.

My advice would be to worry about making a good game first.  Its more difficult to monetize than you think.

[Barrikor]

There's a all-too-fuzzy legal term called "nexus", basically it allows your local government to declare that your company is under their authority even if you incorporate somewhere else.

Also governments can just tack taxes on you for operating "in" they're area. That way your country/state can tax you the same whether you are incorporated there or not. 

[ST-Mike]

Admins have ignored my deletion request - if you're not going to delete my account then don't have the option there please.

[CygnusX]

There is also the option of moving to the moon.  Its pretty lonely up there with no police or fire fighters, no roads or healthcare system...  but since these systems do not exist, there is no need for taxes!  And the IRS will not chase you to the moon.  The other option is to vote conservative.  I also dislike taxes....  but there is little I can do besides vote for government officials that support reduced spending and tax relief.

[chrisjenkinson]

I'm guessing the exact method of revenue matters and would imagine donations, advertisements, and virtual goods could fall into different categories. In my case, I'm (going to be) selling virtual goods for $10 USD each through PayPal. I live in the US and the game server is in the US, but other than that there's nothing really tying the game down to a particular country. I'd hate to sacrifice ~30% of my revenue if it wasn't necessary, which leads me to two questions:

1. Do I have to pay taxes on revenue I collect from the sale of virtual goods in my game?

2. If I do, is there some way I can avoid/reduce this? Could I open a bank account in another country or something?

Speak to a tax professional.

[JGadrow]

No need for a tax professional (also called an accountant).

1) You need to report your income if you have gross earnings in excess of $400 USD for that year.
2) It doesn't matter where your money is... it matters where your business is. However, you can write off tons of stuff as long as it's relevant to your business. Here's some examples:

a) Computer hardware / software if it is relative to your industry. Computer game development would certainly make most of this relevant.

b) Portion of rent / mortgage and any viable utilities if a certain area of your home is dedicated to your business. Basically, if you have an office space that's dedicated to your work for your business, you can figure out the square footage of that area as relative to your home and you'll get that percentage of your monthly bills as a business expense.

c) Bills that arise due to your business. Have a server? Deduction. Buy a domain name? Deduction.

d) Travel expenses due to business. Save your gas receipts. Failing that, keep track of the miles you drive for business purposes. Meeting a client to discuss a project? That's a business trip and you can claim a deduction for that! Last year, I was surprised when my accountant asked for my hotel receipts (good thing I kept them!) because I lived out of a hotel for about 3 months while working on contract. Not only that, but my meals were deducted as well!

e) Office supplies. Buy a pack of paper for your printer? How about some pens, staples, office chair? All of that can be deducted from your earnings. Another tip is to setup a bank account for the business only! For this part, you will need to contact an accountant and figure out everything involved in your state... Pay yourself hourly wages! Or salary if you have a consistent, reliable revenue stream. Personal earnings are almost always at a lower tax bracket than business earnings.

These are some of the tips I've picked up from owning my own business for the past few years. You won't completely avoid taxes, but you can knock them down by quite a large amount. Oh, and it's probably important to mention that there is a fee for being self-employed. I'm not exactly sure how much it is, or if it scales based upon your income during the year... I know I paid about $1250 this year to that fee. But with the payments made from my FT job, I still ended up getting a $1800 refund ($400 of which went to the city... Stupid city taxes.).

[codestryke]

No need for a tax professional (also called an accountant).

If you are going to start writing off part of your rent/mortgage and items JGadrow outlined below then you really SHOULD talk to a tax professional just to make sure what you are doing is not only allowed but correct as well.

[JGadrow]

That's why I was careful not to give exact numbers... An accountant is the #1 solution for all things tax-related. However, an accountant was not required to answer the OP's questions:

1) Do I have to pay?
2) Can I reduce the amount?

I could have just said: "Yes / Yes" but I figured some information would be requested if I had done that.

Obviously tax laws are different in different states; however, the items I detailed apply to federal income tax and are, therefore, applicable to all US residents.

Also, the key to writing off a portion of your rent and utilities - as I stated above - is the space must be dedicated to your business. Your computer sitting in your living room does not allow you to write off the square footage of your living room. However, a small office that is completely used for work-related purposes? All you need to know is the dimensions of the room.

I should probably point out that I do utilize an accountant... have for years. That's why I can state, with absolute certainty, that these are allowable write-offs for your business. And I move a lot so my actual accountant has been different every year. None of them has ever said to me, "What are you trying to write off? No, you can't do that!" Funny part was the one I had this year actually asked me, "You obviously have been through this before and know what you're doing... why are you here?" lol

Mostly, I do it because H&R Block allows me to pay a little extra so that if I get chosen for an audit I don't have to worry about doing anything other than giving them my saved receipts for my write-offs.

[Chris]

Do not forget that all above is for US residents only, some of these are incorrect in other countries (like meals with clients can not be deducted as a cost in UK). If you are not in USA do not use any of these tips, start a new topic for your country of residence!

[JGadrow]

Do not forget that all above is for US residents only, some of these are incorrect in other countries (like meals with clients can not be deducted as a cost in UK). If you are not in USA do not use any of these tips, start a new topic for your country of residence!

Of course, this should have been common knowledge in a thread that has a subject starting with the words: "US game owners" lol

*Edit - Minor grammar correction.

[Chris]

Yes... but some might thought "maybe in my country it is similar". I just wanted to point out that some of these above are definitely wrong in some other countries (even countries with very similar fiscal system).