When tax time comes around, is the hobby of selling the occasional item on eBay or Etsy still really considered a hobby, or have you found yourself in an accidental business?
It’s easy to do! Whether you’re creating something from scratch or restoring old items you find at garage sales, turning a profit on an online outlet is both easy and fun! But before tax season comes and goes, you need to ask yourself, “Am I running a business?”
Here are three ways to take on taxes when your hobby may be a business.
First off, know what the IRS considers a business (something you have to pay taxes for).
If you’re an Ebay seller, The IRS asks potential “business owners” these three questions: “Do you spend a considerable amount of time working on the hobby?” “Do you carry on the hobby in a business-like manner?” and “Do you depend on income from the hobby for your livelihood?”
If you answered “yes” to even one of these questions, you’re running a business. Though, most likely, if you sell the occasional item on Ebay, you’re probably not going to be questioned by the IRS. But if you’re consistently selling goods, there’s a chance that your hobby will be questioned. Either be very prepared with your answers, or just do the math and claim the income.
Sometimes you do start tending to a hobby with the intention and hope that it will turn into a business.
But as you’re going through the motions, trying to turn your hobby into a business, the last thing on your mind is probably taxes!
Etsy sellers, for example, need to pay income taxes on the sales they make. Meaning, they have to fill out the Schedule C Profit of Loss from Business form (just as the hypothetical Ebay seller in the first example would if they answered ‘yes’ to any of the above questions). Even if you are unincorporated or haven’t formed an LLC, you’ll still need to file the Schedule C as a sole proprietor. Don’t fall into the trap of thinking that just because you haven’t formed a legal entity you get out of paying taxes. In fact, in the long run, an Incorporation or LLC can save your business/hobby on taxes.
So now that your hobby is more than a hobby, here are some taxes to keep in mind.
As discussed above, we all know about the big one: April 15th, but there are a couple other taxes to keep in mind once your hobby becomes a business. Online stores will be responsible for sales tax. Basically, the state adds a percentage to each sale to pay for publicly-funded projects around the town, county and state, and it’s up to the seller to collect this tax and turn it in to the correct place. For more about sales tax and selling online check out TaxJar’s Sales Tax 101 for Online Sellers guide.
Additionally, your quarterly estimated taxes are another big one. Basically, if you’re going to owe more than $1,000 in taxes for the year, you have to pay a fourth of the taxes you owe each quarter. You do this by filling out form 1040-ES and sending it to the IRS, or by way of the Electronic Federal Tax Payment System (EFTPS).