Many people pursue hobbies that can easily become small businesses. Since they do it for love, they tend to not realize they have a business when they start selling the fruits of their labor. This can lead to problems when the IRS makes a determination your have a business and should’ve been paying taxes.
How do you know the difference between a hobby and business? Well, we are talking about the tax code here, so the answers are not entirely clear like you would expect. Here are a few questions that can bring a bit of light to the subject.
1. Purpose – Why are you doing the task? Is it to make a profit or just because it is enjoyable? If it is for profit, you are a business.
2. Reliance – Do you rely on the income produced from the task to live or as part of your financial plan? If you do, the task is a business.
3. Efficiency – Have you made a change to how you do things to improve efficiency? Efficiency is usually an issue for businesses and an indication that you are running one.
4. Do you have specialized business knowledge that helps you complete the task? If so, you’ve got a business in most situations.
A hobby or business, you have to report your income to the IRS and state tax agency where appropriate and pay taxes on it. This means investigating the infamous Schedule C that comes with the 1040 tax form. Schedule C is not particularly difficult to fill out, but it comes with a nasty surprise. You must pay a 15.3 percent self-employment tax on the earnings you made. That’s a sizeable chunk of change, and something you usually don’t want to discover when your taxes come due.
Thomas Ajava writes for
TaxAttorneysforMinisters.com - where you can locate tax attorneys for ministers across the country.
