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!
