If you make money in any way outside of your
“regular” job, the IRS probably knows about it. And, if it doesn’t, it wants to
and eventually will. That’s because the IRS wants to tax every cent you make.
However, it’s important to understand that not
all enterprises count as a “business” for IRS purposes. Some do and will allow
you to take business deductions. Then, you have others that count merely as
hobbies and don’t allow for deductions. Obviously, for tax purposes, it’s
important to understand the difference.
Is it a
Hobby?
If you make money from a hobby, you have to
report it to the IRS. However, whether you report it as a business or a hobby
all comes down to expectation. If you expect to make money from your hobby,
then it’s a business. If you’re just doing it for fun, however, and profit is
just a “maybe” thing, it’s a hobby.
While classifying your extra or side work
as a hobby may seem less intimidating come tax time, it actually doesn’t work
in your favor. That’s because you can’t deduct any of the expenses related to
it.
Is
it a Business?
As mentioned, if you can reasonably
expect to earn a profit from what you do, even if it’s “on the side,” you can
count it as a business.
Of course, you should appear as operating
a legitimate business to the IRS. This means keeping detailed financial
records, ideally ones that are separate from your personal records, having
verifiable skills or credentials that increase your likelihood of success in
your chosen area, and depending, at least in part, on the income you make from
your business for your survival.
Contact
A Tax Professional
Whether you think you’re operating a
business or just engaging in a hobby, you really should consult a tax professional for help.
If it’s a hobby, then you’re going to
need to find other ways to lower your tax liability since you can’t take
deductions.
And, if it’s a business, then you need to
be able to take advantage of all of the legal deductions you can to save.
Either way, if you’re earning money from
something outside of your regular 9 to 5, don’t handle your taxes on your own.
It’s just not smart.
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