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Say a person (U. S. resident) has a personal website (which has a Donate button) in which everything on that site is freely accessible whether or not a donation is made. Are the monetary donations collected by the recipient subject to federal taxation according to IRS law? I have looked into this question in the past but did not find an explicit answer.
Also, if there is a clear answer, do states with personal income taxes do the same regarding website donations?
Are the monetary donations collected by the recipient subject to federal taxation according to IRS law?
Yes.
Usually, money received from an activity from third-parties with no personal relationship to you (assuming that "you" are not a tax exempt organization), are taxable income under Section 61 of the Internal Revenue Code as interpreted by case law, as a form of "compensation for services", under I.R.C. § 61(a)(1), or as "gross income derived from business", under I.R.C. § 61(a)(2) (exactly which prong of I.R.C. § 61(a) it comes under isn't legally relevant for tax purposes in this situation).
This is also informed by I.R.C. § 83(a) (which is a general rule even though the balance of the Code section applies mostly to equity compensation in entities), which states in the pertinent parts (material in brackets inserted for clarity):
If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of the fair market value of such property . . . over the amount (if any) paid for such property [by the person who receives the property], shall be included in the gross income of the person who performed such services[.]
But, gifts are expressly excluded from income under Section 102 of the Internal Revenue Code as interpreted by case law.
One point which the case law makes clear, however, is that an obligation to pay doesn't need to be a legally binding obligation to make a payment something that counts as income rather than a gift. The tax law instead looks at the substance of the interaction and the reality of how decent, well mannered people would act under circumstances in which they receive an uncompensated benefit.
Ultimately, whether are voluntary payment made through a private individual or business's website is taxable income or is not taxable because it is a gift is a case by case determination to be made in light of all of the relevant facts.
For example, if your mother donates $7,500 to your website on your birthday, even though all of your other "donations" are from third-parties whom you have never met in person in amounts from $5 to $100 and you have provided all of those other third-parties with some kind of service or benefit through your website (e.g. they were allowed to read free webcomics or listen to music you wrote and recorded without charge over the website), the donation from your mother probably counts as a gift, even though the other donations probably count as income taxable income.
But, in the absence for any reason for the donation other than gratitude for the performance of the services provided by the website, or for the conduct of the business that the website belongs to, the donation will generally be treated as income under Sections 61 and 83, rather than as a gift under Section 102.
The notion of a gift is normally limited by case law and suggestive related section of the Internal Revenue Code that illustrate its intended meaning in the case of gift loans and bargain sales made for donative purposes, to circumstances in which the person making the gift has received nothing in return for it. A donation to a website usually wouldn't meet this test to show a transfer's character as a gift.
The most familiar example, upon which there is a great deal of case law and authoritative guidance, is that tips paid to restaurant and hospitality industry workers are income rather than gifts, and are subject not only to income taxation but also to FICA payroll taxation. These tipping situations are closely analogous to voluntary payments made through a website.
There are a great many tax regulations, court cases interpreting tax law, and authoritative guidances from the IRS (such a revenue rulings) that address the basic concepts that I've set forth above. And, the income tax law authorities are further informed by the statutes and case law governing gift taxation, which is, as intended, interpreted to define a gift in a matter that dovetails more or less perfectly with the definition of a gift for purposes of Internal Revenue Code Section 102.
As the IRS explains at its website discussing the gift tax for which the concept of a gift is defined consistently with the income tax concept of a gift:
The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether or not the donor intends the transfer to be a gift.
The gift tax applies to the transfer by gift of any type of property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.
Donations which are not income are gifts and there is a tax on gifts given (paid by the donor rather than the person receiving the gift). But, there is a $15,000 per donor per donee exception per year from gift taxation for gifts under the Internal Revenue Code, in addition to more than $12 million per lifetime per person exemption from gift and estate taxation for gifts in excess of this $15,000 amount (called the annual exclusion) and inheritances left at death. So, usually, if a transfer is treated as a gift rather than as income, no tax will be due.
But this part of this answer's short summary of the law is the top level conceptual framework for all of those other subordinate tax law authorities.
Also, this income is also subject to self-employment taxation, which is imposed in lieu of FICA on income which is not a wage, salary or employment-related tip. Often self-employment taxes are due on self-employment income even when no federal income tax is owed upon it.
if there is a clear answer, do states with personal income taxes do the same regarding website donations?
Most states and localities with a personal income tax start from the federal definition of income and modify that definition in ways that the taxing jurisdiction deems fit either to make sense (limiting the tax to income related to the state, for example, at least for non-residents), or to fit local policy preferences (e.g. exempting from income taxation, capital gains made in an investment in the state favored by state lawmakers).
Almost no states or localities have chosen to deviate from the federal definition of income for income tax purposes with respect to donations made to websites that are not non-profit entities.
Your PayPal button may say the word donation, but if the PayPal account is in your name it is nothing else but income. If you declare it and pay the correct taxes you should be fine. If you decide to not pay the taxman what he is due, you may get away with it, until you stop getting away with it. Not a place I would want to be personally.
If there are just two government institutions you don't BS in the US it is the tax collectors and family court.
If you do the paperwork and operate a sole proprietorship then you could claim expenses and all the related perks, but this form of business ownership has no separate corporate identity. Which basically means you and the business are one legal entity. If the business gets sued you get sued.
The business profit is your profit and you pay the tax.
If the PayPal account is for a registered non-profit then the donate button is an actual donation as defined in tax law.
Non-profits are not taxed on there profits because by the very definition of there incorporation documents they don't make any profit. This type of legal entity operates under a surplus or a deficit.
People who run nonprofits as a business play a dangerous game.
If your donate button pays money into a for profit business account then there will be applicable gift tax.
The difference is spelled out here. A hobby is a business if it has the characteristics of a business:
Generally, a business involves a set of continuous and repeated activities you do for the purpose of making a profit. Profit can be in money, but it can also be made through other means, like being paid with good or services (such as a barter deal).
Income on hobbies is not assessable but neither are the expenses in pursuing it deductible.
