Hobby vs. Business Taxes
Did you make any money from odd jobs, selling your arts and crafts, playing music, Ebay, Amazon, Mary Kay, Etsy, etc? Do you have to report it?
First, you need to figure out if your project is a hobby or a business. That is, do you do it for pleasure, or to make a living? If it’s a business, you can probably deduct the cost of your equipment and other expenses and fees on your tax return, even to the point of taking a loss. If it’s a hobby, you can deduct only up to the amount of income you earned from the hobby. Which means that either way, you are supposed to report your income on your tax return.
ABOUT REFUNDS: You get a tax refund when you show the government that the money you already gave them (usually withheld from your paycheck, or paid ahead as estimated taxes) is more than what you really owe them, based on how much taxable income you really had. If you didn’t give them any money, you don’t get any back (there are exceptions, particularly if you have any children).
You get a tax refund when you show the government that the money you already gave them (usually withheld from your paycheck, or paid ahead as estimated taxes) is more than what you really owe them, based on how much taxable income you really had. If you didn’t give them any money, you don’t get any back (there are exceptions, particularly if you have any children).
Our job as tax professionals is to look at all of your income, expenses, circumstances and dependents, and figure out how to make your taxable income as small as honestly possible.
DO I HAVE A HOBBY OR A BUSINESS?
For many people, what they do is a hobby. It’s something you do for fun, which sometimes brings in a little money. You would do it even if you lost money on it because it’s something you enjoy. Technically, you are supposed to keep accurate records, report the amount you made from your hobby, and then deduct your hobby expenses on Schedule A, the “Itemized Deductions” page. BUT, depending on lots of other factors, filing a Schedule A may or may not be the most beneficial way for you to file. Even if you do file a Schedule A, your hobby expenses are limited. If you are trying to make it a source of living income, then you may be considered a business. You absolutely must keep records of your income and expenses. There are pros and cons to being a business. I’ll list those, but first, here’s a list that the government takes into consideration when determining if you really are a business. Do any of these describe you?
• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?
• Do you carry on the activity in a businesslike manner and maintain complete and accurate books and records?
If you answered yes to most of those, then perhaps you are a business. Yippee, now what?
PROS: You get to deduct your expenses, even if your expenses are more than the money your business brought in. That means you would have a business loss that you can subtract from other income you had (from a job or whatever). This would reduce your taxable income and possibly result in a refund (or if you owe, you might owe less than you would have). Business expenses can include advertising costs, liability insurance, office rent, legal and professional fees you paid, repairs, supplies, wages you paid an employee, utilities, overnight lodging on a business trip, and many other items, as long as it business related. If your business involves travel (delivery driving, meeting clients, a band on tour, going to Las Vegas trade shows, business convention in Hawaii, etc…) you can deduct travel expenses.
The business mileage rate is 54.5 cents for each mile in 2018. There is also a standard per diem rate for food expenses for overnight travel. Even though you are only allowed to deduct half of your traveling food expenses, this standard allotment is substantial. This means that if you traveled, you racked up a lot of expenses that you now get to deduct.
EXAMPLE: If you are a musician and you drove 3000 miles in 2018 to play shows, you can deduct $1,635 from your income. If these shows took you (one person) out of town for 10 days, you could deduct an average of $51 a day in meal and incidental expenses or $255 (10 days x $51 x 50%). The meal allowance depends on where you travel, for some cities it may be more than $51. You can look up the standard per diem amounts online at www.gsa.gov or ask your tax preparer. Only use the M&IE rate, which stands for Meals and Incidental Expenses.
CONS: You can’t show a loss every year or you’ll look suspicious. Generally, you are expected to show a profit 2 out of 5 years. Even if you don’t have enough profit, if you can show that you ran your business with the intention to make a profit, you may still be able to take the loss.
KEEP REALLY GOOD RECORDS!!!!!!!!!!!
What if you didn’t keep records this year?
We can work with you to figure out what your income and expenses were for 2018 or past years using bank records, credit card statements, etc.
If you show a profit of $400 or more, then you must pay Self-Employment Taxes. When you work a regular job for an employer, your paycheck usually has taxes taken out of it. There’s usually Federal Taxes, State Taxes, Social Security, and Medicare Tax. What you may not realize is that the amount taken out of your check for Social Security and Medicare is matched by your employer. Yes, they have to pay taxes for you out of their own pocket. So when you are self-employed, who pays those taxes? You do!
I’ve given you a lot of information here and tried not to be too confusing. There are many factors that go into a tax return. If your taxes are complicated, hiring a tax professional is a good move. We know you don’t want to give any more money to the government than you have to, and we work to figure out the best possible way for you to file. Please contact firstname.lastname@example.org with any questions you might have.