One question I see a lot in the online business world, is the simple question: Is my business/blog a hobby or a business?
When it comes to filing your taxes, there is a huge difference and you need to know whether your business is a hobby or a business.
There are some major differences on your taxes when you have a hobby or you have a business. So make sure you know which one you really have.
So how do you know if you have a business or a hobby?
How do YOU see your business/blog?
First, let's discuss how do you actually see your business/blog?
Is it something you are just doing as an outlet or for fun?
Or are you actively trying to make a profit and make money in your business?
How you see your business/blog is important.
Is this just a creative outlet for you?
Are you just sharing on your blog for a creative outlet to share what you are doing? Maybe you share patterns that you've created for your crafts or home decor or whatever else your blog may be about.
You could still be making money with your blog even if it's a creative outlet, but it may not be considered a business.
But don't disqualify yourself from being a business just yet. Keep reading to see whether you have a business or not.
Are You Making Money?
If you see your blog as a business, then you should be doing things to make money on your blog.
And just like I said above, even if your blog is just a creative outlet, there are still ways that you could be making money with your blog.
Making money can come from all kinds of sources. Maybe you sell products that you have created. Or maybe you sell products that someone else created (affiliate sales).
The IRS uses the main distinction of whether you make a profit in your business or not, as the main deciding factor for whether you have a business or a hobby.
The IRS has 9 Factors to Consider
There are 9 factors that the IRS considers and you can take these same questions and answer them for yourself in your business to determine if you have a hobby or a business.
Here are the questions directly from the IRS website:
- Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records
- Whether the time and effort you put into the activity indicates that you intend to make it profitable.
- Whether you depend on the income from the activity for your livelihood
- Whether your losses are due to circumstances beyond your control
- Whether you change your methods of operation in an attempt to improve profitability
- Whether you or your advisors have the knowledge needed to carry on the activity as a successful business
- Whether you were successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
Ways you can get yourself set up for being a business
There are a handful of ways that you can set yourself up to be a business instead of just a hobby.
When you do these things in your business you can improve your position as a business and for making a profit.
These items also help you be considered as a legitimate business:
- Register with your state as an LLC, partnership or corporation (do your research for what fits your business best and work with an accountant and/or lawyer when needed)
- Set up a separate business checking account and keep your business and personal expenses separate
- Maintain a regular and good record keeping system
- Comply with all state and federal tax regulations
- Create a plan to make a profit in your business
- Treat it like a business and work on and in your business regularly - don’t just work on it when you feel like it.
I know that you started your business because you want it to be a business and to make an income, so set it up that way.
Do you have a hobby or a business?
You can do all these tests for yourself and your business to determine if you really have a business or just a hobby.
When you have just a hobby, most of the expenses that you have for a business you do not get to deduct, but you must report all income that you make from the hobby.
At the end of the day, when you set things up as a business, and treat it like a business, you’ll be able to create the business that you want.
If you only work on your business, or hobby, when you feel like, don’t treat it like a business, then it just isn’t a business.