Hey ,
I wanted to reach out to you to clarify the distinction between a hobby and a business, as there are important tax implications for taxpayers in the USA.
Firstly, a hobby is an activity pursued for personal enjoyment or satisfaction. In contrast, a business is an activity that is conducted with the primary intention of generating a profit.
The IRS considers several factors when determining whether an activity is a hobby or a business, such as the amount of time and effort put into
the activity, the expectation of profit, and the taxpayer’s expertise in the area.
For taxpayers in the USA, the tax implications of
having a hobby versus a business differ. If you have a hobby, any income earned from that activity is generally not subject to self-employment tax.
However, you also cannot deduct any expenses related to your hobby from your taxable income.
On the other hand, if you
have a business, you must pay self-employment tax on your net income (i.e., your income minus your business expenses).
However, you
can also deduct any legitimate business expenses from your taxable income, which can help offset the tax burden.
It’s important to note
that if the IRS determines that your activity is a hobby rather than a business, you may be required to pay back taxes and penalties.
Therefore, it’s important to understand the distinction between the two and keep thorough records of your income and expenses. This is where bookkeeping comes in.
You may need help handling your hobby income and understanding your tax status before the IRS forces you to. Call my office now at 202-618-1297 to become my tax and bookkeeping client, or click the link below.
