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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 tax tips can help new business owners find success

Business Structure

Starting a business can be very rewarding. It can also be a little overwhelming. From business plans to market strategies, and even tax responsibilities…there are many things to consider. Here’s what new business owners can do to help get off to a good start.

  • Choose a business structure. The form of business determines which income tax return a business taxpayer needs to file. The most common business structures are:
    • Sole proprietorship: An unincorporated business owned by an individual. There’s no distinction between the taxpayer and their business.
    • Partnership: An unincorporated business with ownership shared between two or more people.
    • Corporation: Also known as a C corporation. It’s a separate entity owned by shareholders.
    • S Corporation: A corporation that elects to pass corporate income, losses, deductions, and credits through to the shareholders.
    • Limited Liability Company: A business structure allowed by state statute.
  • Choose a tax year. A tax year is an annual accounting period for keeping records and reporting income and expenses. A new business owner must choose either:
    • Calendar year: 12 consecutive months beginning January 1 and ending December 31.
    • Fiscal year: 12 consecutive months ending on the last day of any month except December.
  • Apply for an employer identification number. An EIN is also called a federal tax identification number. It’s used to identify a business. Most businesses need an EIN.
  • Have all employees complete these forms:
    • Form I-9, Employment Eligibility Verification
    • Form W-4, Employee’s Withholding Allowance Certificate
  • Pay business taxes. The form of business determines what taxes must be paid and how to pay them.

Taxpayers interested in starting a business can find information for some industries on the Industries/Professions Tax Centers webpage. Each state has additional requirements for starting and operating a business. Prospective business owners should visit their state’s website for info about state requirements.


More information: Small Business Admiration’s 10 steps to start your business

Second-quarter estimated tax payments due June 17


Self-employed individuals who don’t have taxes withheld from other sources of taxable income (such as interest, dividends or capital gains) need to pay estimated tax payments throughout the year. The second quarter tax payments are due June 17.

Never miss a payment. Use the IRS Tax Calendar for Businesses and Self Employed. It’s available in English, Spanish and downloadable to your smart device.

LLC vs. Sole Proprietorship

Business owners have a big choice to make in structuring their companies.

The options for ownership structure for entrepreneurs usually come down to two choices – sole proprietorship or limited liability companies (LLCs).

Each structure has its upsides and its downsides, and no new business owner should sign any legal agreement on his or her new company until proper due diligence has been done on sole proprietorships versus LLCs.

What Is a Sole Proprietorship?

A sole proprietorship is likely the easiest business structure to implement, but it is not considered to be a legally binding entity.A sole proprietorship can be created with any name the business owner wants. In legal terms, the company name in a sole proprietorship is just a name – it doesn’t split the business owner away from his or her company, like an LLC does.

On the downside, if there are any legal financial liabilities, lawsuits, fines, debts and other obligations, they are now at the expense of the business owner’s personal assets. A sole proprietorship is essentially the business owner operating under a different name.

What Is a Limited Liability Company?

A limited liability company offers new business owners something of a win-win from a tax and legal standpoint – the pass-through taxation benefits of a business partnership or sole proprietorship along with the limited liability protection that comes with being a corporation. By structuring a new business as a limited liability company, that business starts out as its own separate and legal entity, with separate debts and assets that remain apart from the owner’s personal financial picture, with the exception of the owner’s personal taxes.

Think of an LLC as a blend of a business partnership and a corporation.

The term “limited liability” means exactly that – unlike a sole proprietor, a limited liability business owner is protected against lawsuits, debts, and other financial obligations related to the operation of the LLC.

By and large, a limited liability company owner has largely protected himself or herself from creditors and legal trouble.

We at NestEggg recommend that you have the highest form of protection for your personal assets when conducting business.

If you would like for us to help you incorporate your business as an LLC or other entity, we would be honored to help you.

We are now offering specials to all businesses looking to incorporate and to have with Accounting & Tax. You can reach us at 760-322-4622

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