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Is your side gig a hobby or a business
I had a conversation with a fellow designer recently who works full-time for an ad agency and periodically takes on small design projects on the side. He called it a hobby. That got me thinking, what is a hobby and does what he’s doing qualify?
Hobby vs. Business
Standard disclaimer: I’m not a lawyer, accountant, tax expert or business advisor. The following is solely my opinion.
Hobby: A hobby is an activity done for enjoyment, typically during one’s leisure time. A hobby encourages the acquisition of skills and knowledge in that area.
Business: Business is the activity of making money by producing or selling products such as goods and services. Simply put, business is any activity or enterprise entered into for profit.
By those definitions, any design work you do where you get paid should be considered a business venture. At least you would think.
When does a hobby become a business?
According to the IRS, a hobby is an activity that an individual pursues without the intent of generating a profit. “Intent” is the keyword here. Meaning it’s ok to make money pursuing your creative hobbies as long as it wasn’t your intent, to begin.
For example, let’s say you have a screen printing machine and print yourself graphic T-Shirts. If someone sees one of your shirts and offers you money to make one for them, it’s still considered a hobby, because it wasn’t your intent to sell the design or shirt when you created it. However, if you designed and printed the shirt with the hopes of selling more like it, then it’s a business.
An artist who paints for the joy of it, and sells the odd painting to cover the cost of supplies is considered a hobbyist. But as soon as that artist decides to showcase their paintings, in the hopes of selling them for a profit, it becomes a business.
If you create something because you want to help a friend, a family member, your church, a local organization or charity you support or your kid’s sports team, and they offer you money for your generosity, as long as you intended to help them and not of making a profit, then it’s not a business dealing.
However, if that friend, family member, church, organization or charity asks you to create something for them in exchange for payment of some kind, then your acceptance is based on the knowledge you will be making a profit. Therefore it’s a business transaction.
Why is the distinction between hobby vs. business important?
The distinction between hobby vs. business is essential for tax purposes. Yup, blame it on the government. If you are making a profit from something, they want their cut. But that could be a good thing.
If you are making money from your “hobby” or “side gig” you should want the taxman to take a cut. Why? Because as a hobby, you can’t deduct losses and expenses on your tax return. But once you’re hobby is classified as a business, you are entitled to the same tax advantages other businesses enjoy. Including home business expenses or additional costs that don’t typically apply to income from your day job. Who knows, declaring your hobby a business, may even end up saving you money on your taxes.
Check with a professional.
Rules may differ depending on where you live, so check with a professional in your area to see if your side gig or hobby qualifies as a business. Keep in mind; you have to be actively seeing to make a profit for what you do to be considered a business.
But be careful. Even if you are actively seeking to make a profit, don’t just declare what you’re doing as a business without checking with a professional first. There are stiff penalties for claiming business expenses on your taxes if you don’t qualify for them.
What the IRS is looking for in declaring a venture a business.
The IRS has a vague outline for determining the state of your earnings. However, here are some rules that may help you achieve business status with your hobby.
- You engage in your activity with continuity and regularity.
- You’re taking actions to improve profitability.
- You keep accounting and business records.
- You consult professional advisors to help improve profitability.
Officially declare yourself a business.
The easiest way to get the IRS or any government tax agency to view what you do as a business is to make it official.
- Name and register your business.
- Open a business banking account
- Begin collecting sales tax if applicable
- Hire a CPA and other advisors.
There are no guarantees the IRS or whatever taxing agency there is in your country will consider you a business. But if you officially register as one, chances are they’ll agree with your assessment.
Is your design business registered?
Let me know by leaving a comment for this episode.
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