Does Your Hobby Require You to Pay Taxes? – Guest Post
You may dabble in several hobbies to indulge your interests and passions. For example, you may be an avid painter, crafter, or musician. You may even make some money off of your hobbies by selling your artwork, creations, and musical recordings at fairs and through websites like Etsy.com, eBay.com, and your own official site. Yet, while these activities may seem innocent enough and require no other action beyond making the product and selling it, you may actually be required to account for your hobbies within your tax forms.
According to the guidelines established by the Internal Revenue Service, if you have made a substantial amount of money and have had your hobby in place for at least a year, you may have to account for those activities in your tax forms because your hobby could be classified as a business. The difference between a hobby that is still a hobby and a hobby that also happens to be a business is in intention. If you actively create things with the intent to sell them, no matter how small the price of your product may be, your hobby is likely to be classified as a business by the IRS because you purposely try to make money off of your actions. On the other hand, if you actively create things and only sell a few of your creations due to happenstance, then you may not have to report your activities to the IRS because your hobby is still just a recreational activity and is not a money-making endeavor.
There are additional guidelines set by the IRS as well to determine whether a hobby is truly just a hobby or also a business. For example, the amount of time and effort you spend on your hobby could determine whether it is a business or not. If you devote several hours of your day to pursuing a hobby and go through enormous efforts to create something, then you could have a business on your hands. Yet, there are those who are simply dedicated to their hobbies and not looking to make a profit, so with that in mind, the IRS has other qualifications set up for businesses. One of these is whether or not your livelihood depends on your hobby. If you depend on the income earned from your crafting, then you have a business and not just a hobby. Also, if you have ever changed any part of your hobby in order to make it more profitable, you also could be dealing with a business.
Previous business knowledge is another factor that the IRS considers when deciding whether or not your hobby is a business venture. If you possess the skills and knowledge to turn your hobby into a business, then your hobby may automatically be considered a business. For example, if you run a bakery and bake goods at home to sell, then your “side hobby” will most likely be considered a business due to the fact that you could easily earn money off of it.
Finally, whether or not your hobby has made any money is something that the IRS takes into account. Even if you set out to make money with your crafts and music, if you have not made any money since you began, you do not have to mention your activities on your tax forms. Understanding where your hobby stands is essential, thanks to the fact that hobby businesses account for approximately $30 billion in unpaid taxes.
Alvina Lopez is a freelance writer and blog junkie. She welcomes your comments at her email Id: alvina.lopez @gmail.com.