You Call It a Hobby, the IRS Calls It a Business
I see it all the time. Someone starts selling a few of their crochet dolls, a handmade candle, or sourdough bread online. It’s a hobby, they just want to make some costs back, but then it starts bringing in real money! Woohoo!
But here’s the catch: if you’re earning income, Uncle Sam wants a piece of it.
The IRS Doesn’t Care About Your Passion Project
When it comes to taxes, your love of crafting, repurposing old furniture, or sewing is completely irrelevant. What matters to the IRS is your intent. Are you doing this for fun or profit?
They use multiple factors to determine which category your project falls into, but essentially it all comes down to: Do you act like a real business? (Hint, keeping receipts in a shoebox doesn’t count)
If you’ve gone from charging Aunt Gloria a few bucks to make back the costs of the quilt you sewed for her to charging a premium for your hard work, congrats. You’ve crossed over to the dark side and you’re now a business owner. Time to pay your taxes!
Hobby or Hustle? What's the Difference?
By now, you’re probably feeling a bit kerfuffled. When exactly do you start paying taxes on this project of yours?
Let’s break it down quickly:
Hobby:
Done for fun
No formal records
No separate bank account
Occasional income
Can’t deduct losses
Business:
Done for profit
Keeps books/receipts
Has business finances
Regular sales/clients
Can deduct legitimate expenses
In short, a hobby buys glitter glue because it’s fun. A business buys glitter glue and deducts it.
Show Me the (Tax-Deductible) Money
Why does it matter whether you’re a hobby or a business when the IRS wants money from you anyway? Well, it’s all about the benefits and perks.
See, if you have a hobby, you still have to report your income (non-negotiable!), but you can’t deduct your losses or most expenses. Ouch.
If you’re running it as a business, though, you can write off expenses. When you purchase items for your business, it’s all deductible. You can get a tax break for your business and write off losses, too.
And yes, that’s as crazy as it sounds. So, basically, if you’re going to be bossed around by the IRS anyway, you might as well go full business and get the deductions too. Make it worth your while to pay those taxes.
Own It (and Maybe Get an LLC While You’re At It)
If your little side thing is starting to make real money, don’t wait. Start treating it like a business now. Separate your finances, keep receipts, and make sure you’re filing your taxes properly. Go ahead and sell your art, fancy chocolates, or your weird cat sweaters. Just don’t forget, the IRS is watching and they do love a good side hustle. Ask Anna Tax can help you with the transition from hobby to business so you’re set up properly for the future.
