We all have our interests/hobbies, and some people are able to produce a little income from some of these activities. Some examples include doing odd jobs, selling things you make, selling things on Ebay, playing music, and much more. An employee of mine plays music in weddings. Upon reviewing his resumé, I was really impressed when I saw he owned his own business and pretty much hired him on the spot. It turns out that his pursuits align more with hobby income, although for the resumé it is impressive to call it a business. This got me thinking about the rules concerning these classifications and the significance of the impacts this could have on a person’s life.
Do you depend on the income of your pursuits in order to live? Do your decisions impacting the activity indicate that you are pursuing profit? If there are losses, do they occur due to circumstances beyond your control? These are just a few of the many questions needed to be answered to determine whether or not an activity is considered a business. Many of these questions can be found with a quick Google search or consultation with your local CPA (I’m always available). Knowing what to consider your activities will save you a whole heck of a lot of trouble in the future!
A business that shows a profit of $400 or more in a year must pay Self-Employment taxes. When you work a job for an employer you see these taxes taken out on paystubs and W-2s, but what you may not know is that the employer has to match some of these taxes. When you’re self-employed you have the privilege of paying what needs to be matched with Social Security and Medicare.
Next, as a business you may have the benefit of better deduction circumstances. With hobbies, you are only able to deduct expenses up to what you make whereas with a business you can deduct anything that is eligible up to a loss. As a business you also have more expenses that may be deducted. These include travel, advertising, wages, legal and professional fees paid, supplies, and many more as long as it is business related. While being a business gets to take advantage of these benefits, it also requires more time and effort because you also need to keep extensive records of these actions for legal/tax reasons.
Are you operating a business or simply enjoying your hobbies? Knowing the answer to this is very important. Either way, you ought to have fun with whatever the pursuits may be!
Sean P. Riley, CPA
Hubmer, Enstad, Ovik & Co., Ltd.
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