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Hobby or Business – How Do I Know?

Hobby or Job

Many of us engage in pursuits outside of our “regular job” and sometimes that means making some money from those pursuits.

But when is it a hobby and when is it a business?  Well, that sort of depends on your objective.  Say, you are a big knitter.  You just can’t stop knitting and when it gets cold all of your friends ask you where you got those great hot pink mittens, you tell them and they want you to make them a pair but insist on paying you.

Now, if you can knit a pair of mittens for $8 and you sell them to your friend for $20, you have just made $12 and yes, you are supposed to report that income on your taxes.  But you can also deduct the cost of the yarn and needles to make them.

If you think to yourself, “That was nice, now I just have to make John and Emily their mittens and then I’m done. Phew!”  Just as above, if you earn income you must report it, but it is still firmly in the hobby column.  If, however, you think to yourself, “Wow, that was fun! I’m going to start an Etsy page and see if I can sell these to the public” then you have just started yourself a small business.

On The Right Track

There are some things that make it a business rather than a hobby outside the Etsy page though.  The IRS lists nine things that make it a business.  You should make sure you meet the criteria before you file the income and expenses from your knitting as a business on your taxes. 

First is, do you keep proper books for your knitting?  If you estimated that $8 cost and you spend your own money then you’re still in hobby zone.  If you know it takes exactly three and a half skeins of yarn to make those fabulous mittens in wild colors and you have a separate bank account for or keep careful track of those expenses then you are properly accounting for your expenses and you may have yourself a business.

Another important distinction is how you treat the time you spend pursuing the endeavor.  If you have scheduled yourself to knit evenings from 6-8 and Saturdays from 8-4 and you consistently show up and do the work then you are treating it like a business.  Also, do you market your product or service?  Do you have ads or place business cards in your local craft shop offering your services?  Then you are in business.

Work Work Work

The most important thing is consistency and how you are managing your work and your business.  It doesn’t matter so much that you make a profit, the IRS understands that starting a business is difficult and not always profitable within the first few years, but that you are trying to make a profit, that you are relying on that income to pay your expenses and that you are properly accounting for all your income and expenses and reporting those on your taxes.

And just as you learn more and more about your hobby and how to master it, so should you learn and grow in how you conduct business.  The more you understand about how to properly run a business the more time you can spend knitting!

These summer activities can affect next year’s tax returns

Tax Return Filings

Summertime activities often affect the tax returns people file the following year. Here are some things taxpayers do during the summer along with tips they should consider now:

  • Getting married.
    Newlyweds should report any name change to the Social Security Administration. They should also report an address change to the United States Postal Service, their employers, and the IRS. This will help make sure they receive documents and other items they will need to file their taxes.
  • Sending kids to summer day camp.
    Unlike overnight camps, the cost of summer day camp may count towards the child and dependent care credit.
  • Working part-time.
    While summertime and part-time workers may not earn enough to owe federal income tax, they should remember to file a return. They’ll need to file early next year to get a refund for taxes withheld from their checks this year.

    Normally, employees receive a Form W-2, Wage and Tax Statement, from their employer to account for the summer’s work. They’ll use this to prepare their tax return. They should receive the W-2 by January 31 next year. Employees will get a W-2 even if they no longer work for the summertime employer.

    Summertime workers can avoid higher tax bills and lost benefits if they know their correct status. Employers will determine whether the people who work for them are employees or independent contractors. Independent contractors aren’t subject to withholding, making them responsible for paying their own income taxes plus Social Security and Medicare taxes.

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