Business Or Hobby: Here's Where To Draw The Line!

30, Oct, 2020
Business or Hobby: Here's Where to Draw the Line!
Author - Phil Baker

Are you looking to turn your side hustle into a way to make more revenue? Turn your hobby into a business? What many people don't realize is that you still need to report these on your taxes each year. Be it a full time job or a hobby income. The IRS has a label for both business and hobby, so you'll want to figure out which one your revenue falls under.
 If you find yourself asking "is it a business or a hobby?" then be sure to use this in-depth guide to figure it out.

How Can You Draw the Line?

One of the trickiest things about reporting both your hobby and business earnings is keeping a clear and definitive line between the two. How can you find the best way to go about it? Fortunately, there are several concrete steps you can take to do this the right way. See below for tips on how to separate hobby income and business revenue.

1. Have You Kept Clear Records?

If you don't take the time throughout the year to organize each source of revenue, you will find yourself scrambling come tax time. In fact, you might be so delayed that you file taxes late as a result. One of the healthiest habits for this is, generating pay stubs or invoices for each of your hobby transactions.
By simply sending an invoice to all your clients, you can keep a record of what amount went towards the hobby and when it was paid. The accuracy of these records is vitally important. The clearer and more detailed they are, the more helpful they'll be a year from now when you're filing your taxes.

2. Are You Storing A Percentage Of Your Hobby Income?

There are many advantages to freelancing and being paid for your passion, but come tax time, you'll be in for a world of hurt if you haven't set any money aside. Odds are that, for your hobby, your clients are paying you without taxes being taken out. So when you report that income next year, you'll need to pay the taxes on the money that wasn't taken out.
For that reason, it's always a good idea to store 30 or 40-percent of your earnings with your hobby in a savings account. That way, if you owe anything next year you can use it to pay back your taxes.

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3. How Much Time Have You Spent On The Hobby Business?

Of course, there always comes a time where people consider turning a hobby into a full-blown business. They wonder what it might take to pull that off. How can you determine whether it's the right move to make? To answer that question, just look at your past year of work. Have you been treating and conducting a hobby business?
Do you receive payment for every time you perform the hobby or is it just every so often that you get paid? More importantly, how much time have you spent on the hobby? The more time and energy you've put into it, the more successful that you'll be.

How Should You Approach Hobby Deductions?

Generally speaking, you'll be allowed to deduct certain expenses that are relative to the hobby. There are two terms that you should know in regards to hobby expenses: necessary and ordinary. Necessary expenses are the spendings on things that are required to perform the hobby such as a camera for photography, painting supplies for painters, etc.
Ordinary expenses are those that are generally accepted as an expense for the activity such as a lighting kit for photography or buying Microsoft Word for freelance writing. However, there are certainly limits to these expenses. You're only allowed to list several hobby expenses that are equal to or less than your hobby's income for the year.

What Filing Software Should You Use?

If you're making $64,000 or less, you can use the big-name tax software such as TurboTax, TaxAct, or Liberty Tax. Also, the Internal Revenue Service is offering an IRS free file that you can use to file tax returns until October 16th this year. No matter the software that you choose, you'll find them helpful in laying down definitive definitions for both your hobby and business earnings.
This will give you more peace of mind that you're filing correctly. It will give you options for listing expenses, deductions, the revenue you made on both, and so on.

Should You Seek Professional Help?

The short answer to this question: it never hurts. Getting the help of a professional will ensure that you're filing everything under the proper category. All your hobby income and business earnings will be filed accordingly, ensuring that you don't undergo a tax audit by the IRS down the line.
They can also help list out all of your options for you so that you can make the best decision for you and your family. Bring all your invoices and documentation on expenses fo a more detailed explanation.

Is It A Business Or A Hobby: List the Details of Each

Now that you've seen several ways to answer your question of "is it a business or a hobby?", it's time to get yourself organized to file your taxes from this day forth. For more information on the process, be sure to read this article to learn how tax returns work

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