Here’s a friendly question from Prestige Auditors: what are you really doing? Are you working for a company? Or do you have your own business? Or maybe you’re enjoying your hobby and earning money at the same time? These questions are usually circulating among US citizens, who are enjoying their favorite hobbies while earning money from them at the same time!
This is an important topic to discuss, especially when it comes to taxes. That’s why the Internal Revenue Service (IRS) has created criteria according to which you are able to decide the nature of your “work.” If you find the criteria mostly relatable to what you’re doing, then it’s probably a business; but if you’re standing between a fifty-fifty decision, take a look at the profits you made for a 5-year period. If you made profits for at least three years, then congrats, you’re operating a business! And what’s more, the so-called hobby which suddenly became your business will have to be declared. So, you’ll need Schedule C to declare your income, and pay more money to the IRS. After declaring, you’ll automatically have to spend your money on tax coming from your income (income tax) and self-employment taxes!
Hobby, or Maybe…Business?
Look at the following questions, and try to answer them. If most of them are “yes,” you’re probably conducting your own business, and you’re a businessperson now!
- Do you keep books and records of everything you do while working on your hobby (business)?
- Are you determined to make profits out of your hobby? “Whether the time and effort you put into the activity indicate you intend to make it profitable.”
- Do you depend on the income you get for your hobby?
- Have a look at your losses. Are they “due to circumstances beyond your control (or are normal in the startup phase of your type of business?”
- In order to boost your hobby, and therefore, income coming from that, do you constantly take different measures, and change methods of operation?
- Do you (or your consultants/mentors) have the knowledge for successful business operations?
- Have you made profits from similar activities in the past?
- Are you anticipating future profits “from the appreciation of the assets used in the activity”?
Now take a look at these points, and try to answer them. What do you think, is it a business or is it a hobby, after all? Or maybe you once had a business that slowly changed into a hobby? Everything is possible here!
Keep in mind that if your business is slowly extinguishing and turning into a simple hobby, keep your chin up and keep recording your every business-related step. You should also think about your business operations, and what you’re doing wrong so far! If you can’t figure out the reason behind the failure, contact us at Prestige Auditors and we will audit your business to find all the shortages that it may have. If you already have a business, don’t let it become just a hobby! Take the next step toward success now!