Every month I make money from Patreon. I want to split my income with a partner. How do I avoid paying taxes on 100% of the income?

Question

Let me start off by saying I have no idea what I'm doing here. The context is, I am making a game, and every month I make $400 or so from Patreon (people are my patrons, and they are paying me because they want to see the game be created). This money goes into my paypal account (there is no way to avoid this), and then i send this money to a business checking account I've created.
Starting this month, I've decided to partner with somebody on my game (an artist), and we are going to split the profits 50-50. Unfortunately, Patreon has no concept of splitting income. Every month, 100% of the profit will go to my PayPal. From PayPal (or maybe from my personal business checking account), I plan to send 50% of what I earn into my partner. This personal business account isn't anything special. It's just a separate checking account that I only use for business.
I'm worried about the tax implications of getting 100% of the income and then sending 50% to someone. Will the IRS look at this and say I should be taxed on 100%? It's seems like there should be a way to only pay on the income that I keep at the end of the day.
How do I avoid paying taxes on 100% of the income when I only keep 50%?
I do not have and LLC... I don't even have a DBA. I live in California.

**Follow-up questions: **

How do I avoid forming a general partnership while splitting income 50-50 with someone else?
Is there any way to form an anonymous General Partnership?

Harper - Reinstate Monica · Accepted Answer

What you have there is a General Partnership.
You already have a General Partnership.  You didn't need to do anything to create it, it just arose when you agreed to share revenue.   In this situation you split income and expenses as far as the IRS is concerned.  You don't get much flexibility in how this is done, because you have a General Partnership and not an LLC. Read Publication 525 for guidance.  If you want to do something unusual with asset allocation, shares, etc., you can't do that in a General Partnership; that's what LLCs are for.
Your expenses pass through onto your individual tax returns, as does your income.
Yes, Patreon and PayPal will report income to the IRS as your income. Your taxes, however, will show you disclosing only half that income, and they'll see that you have a partnership with 1 other person (via the Form 1065 the partnership files and each partner includes with their taxes). IRS will go "OK, that makes sense".  It's not the first time they've seen a partnership, and they are familiar with the janky way Patreon and PayPal want one partner to be the reportee for tax purposes.  I mean yeah, it'll trigger a review  ("audit"), but they'll figure it out without ever needing to contact you.
It might be wiser to open a bank account in the name of the General Partnership.  The bank will want your personal info and your partner's personal info. They won't care what name the partnership uses and it won't have a separate legal identity. You'll both be liable for overdrafts etc.
In fact, each partner will have unlimited liability for the debts of the partnership. So if the partnership gets sued and loses, they will go after all of you until they are paid.  To fix that get an LLC or corporation, and don't be grossly negligent.

Ben Miller - Remember Monica · Answer

Let me first say that I am not an accountant.  I recommend that you do meet with an accountant; he or she will be able to tell you the best way to handle this.  That having been said, I'm going to offer you one idea for handling this.
Probably the least complicated way to structure this is as a separate sole proprietorship for each of you.  You would claim the entire amount from Patreon as revenue for your business on your Schedule C.  Your partner in this scenario would be a vendor that you are paying for his art services.  You would deduct the amount that you pay him on the Schedule C.  You can also deduct other expenses that you have in producing this game.
Your partner would have his own Schedule C business, and claim the amount you paid him as revenue for his business.
In addition to the Schedule C, you would probably need to file a 1099-MISC that you would give him if you paid him $600 or more in a year.
There are other options, such as a partnership, LLC, or corporation, but they are more complicated.

John · Answer

I'd form an LLC, with the partner (or not).  (I used Legal Zoom to do this, a few years ago.  Today it costs $79.  (There may be some minor state fees, no capital requirements in my state.))
Get a bank account in the name of the LLC.
Connect bank account to Patreon/Paypal.
Have funds go into bank account.
Transfer funds from bank account to your account and your partner's personal accounts.
Keeps the accounting very clean, the money trail very clean, and very cheap.  I did just this once for a consulting gig I had many years ago, with a similar situation.

John Littlefield · Answer

Since you are receiving 100% of the income all you need to do is spend / pay your partner for consulting expenses. 50% as an expense to your partner as professional services for their work. You'll need to file 1099-NEC (Non Employee Compensation) form with the IRS. Once to account for the expense you do not pay taxes on your expenses they are ALL tax-deductible.

Answered by John Littlefield on June 21, 2021

Anonsage · Answer

If you really don't want to deal with forming an LLC or doing other business-y things, then you can do math with your partner to include the taxes in your 50-50 split.
Math, let:

X = Amount you get paid, without taxes
Y = Amount your partner gets paid, without taxes
X = Y

Therefore:

total_earned = X + Y + (taxX * total_earned) + (taxY * Y)
total_earned - taxX * total_earned = X + X + taxY * X
total_earned(1 - taxX) = X(2 + taxY)
X = total_earned(1 - taxX) / (2 + taxY)

For example, if:

totalEarned = 1000
taxX = 25% (your tax rate)
taxY = 25% (your partner's tax rate)

Plug in the numbers and you get:

You both get paid $333.33
Amount you get paid, including taxes: 333.33 + 1000 * .25 = $583.33
Amount your partner gets paid, including taxes: 333.33 + 333.33 * .25 = $416.67

But, if you use this method, then you are double-paying taxes (333.33*.25=$83.33) on part of the income. Except, if your partner makes under the threshold for paying taxes, then you can set 'taxY = 0' and solve again. (solution would be payouts of $625 (375 + 1000*.25) and $375)
Math!

Every month I make money from Patreon. I want to split my income with a partner. How do I avoid paying taxes on 100% of the income?

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