What is your best tax advice for when your hobby begins making you money?
People often dream of making money in their chosen hobby. My question becomes, what is some basic advice on taxes, when you begin to make money on your craft? For those that want to really jump into their craft, is it worth it when all is said and done, after reporting and paying all taxes? It sometimes seems just easier to have an employer that takes out taxes, and then you fill out your own forms, etc. If hiring an accountant or tax preparer to help, doesn't that eat up all your cost also? As for saving receipts, do you just save from the last year only, etc?
The laws in each state need to be assessed, as well as the federal IRS laws, when making the decision on whether to profit from a hobby. There are some interesting resources to help guide a person as they explore the possibilities: http://dontmesswithtaxes.typepad.com/do … -both.html
At one point in my life, I did have a hobby (china painting) that turned into a business. I have to say that collecting and paying sales tax was a real pain in the neck. And that's not even thinking about income taxes, yet!
Do keep your receipts longer than a year. I'm not sure what the legal time frame is, but I used to keep mine for 3 years, I believe. Check the IRS website for up-to-date rules on keeping receipts.
You must also keep detailed records of your deductible expenses as well as income so that you can deduct related travel, cost of supplies and equipment, and the expense of your home studio, if you have one. In the end, you may break even or even show a loss on paper. Record keeping is time consuming and can be confusing if you are not an accountant.
Only you can decide if this is all worth it. I loved my hobby/business, and, for me, it was worth the trouble of taxes and record keeping. Sometimes, the only way you can continue to grow in your hobby is to sell your work---and then it's a business whether you planned it that way or not!
Don't play "fast and loose" with the tax people, especially the IRS. Do your best to get it right even if you need to hire some outside help.
To turn your hobby into a business, you need to ask yourself if you really have a profit motive? That's what the IRS will want to know if it comes to an Audit. Profit is not always the same as what people think it is. Have you really did the accounting and determined that after all expenses, you made a profit. Everything that goes into making and item or what ever you do, is an expense. Add it all up and see what you made, really. You do not necessarily have to make a profit in the beginning, most do not, but it must be clear that it is what you are trying to accomplish. Turning your hobby into a business will take some of the enjoyment out of it but that doesn't mean it still wont be better than your current job. I would say, keep your job and turn your hobby into a business on the side at first to see how it goes.
Laws are always going to vary between countries and even states so the below is advice that will apply well everywhere:
-Keep detailed records of everything (income/expenses). Nothing worse than not recording something and finding out later it was tax deductible. You also have to factor in that keeping records such as these are also good from a business standpoint, you can quickly analyse if you're making money (and how much).
For some people this might be writing it down, having a filing system for receipts/invoices but if you are reasonable with a computer having it in Excel or a similar program will let you do much more with it (even simply filtering or graphing).
-Spend the money for tax help, it's invaluable in the early years but make the effort to understand why everything is being done and the process, after 2-3 years you should feel comfortable handling it yourself.
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