Friday, September 7, 2012

I'm just a hobbyist, I'll just report my income on my income taxes for now.

That's an option while you are building your plan and in many instances a really good option! However, it's just a LITTLE bit more complicated than just reporting your hobby income. You also really need to take a strong look at if it would benefit you in deductions to be a full fledged business. You also need to look hard at if you truly are just a hobbyist or if you are a business. 

According to the IRS website this is the criteria a person should use to decide if you have income that is from a hobby or a business. This quote comes directly from the IRS website HERE

In order to make this determination, taxpayers should consider the following factors:
  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Does the taxpayer depend on income from the activity?
  • If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
  • Has the taxpayer changed methods of operation to improve profitability?
  • Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
  • Has the taxpayer made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
At the early stages you are probably a hobby and can report your income as such.


You still are responsible for sales tax!!! Yep, even as a hobby!!! And you do not want to get “THE CALL” from the state saying you are responsible for sales tax you didn't collect or pay. There are only five states with no sales tax. Alaska, New Hampshire, Montana and Oregon. If you live in one of those states-you are one lucky soul! The rest of us are SOL and have to do it.

The SBA is a wealth of information and I encourage you to use it extensively as you are building your plan, starting your business and beyond.

The SBA has a great page on taxes and hobby income which can be found HERE
In short-hobby income is fine for the hobby phase of this venture, however you are still responsible for sales tax and have to register, collect and submit that tax. It's not all that hard and it won't cost you an arm and a leg. Most states it's free! So, please CYA and do it!!! There are a lot of people out there who are more than willing to turn you in. As much as I'd hope any professional in the business would help a newbie out, we know it happens. I've gotten THE CALL. I was legal, thank God, but I wouldn't want to have had to pay that bill if I hadn't been doing it.

Collecting sales tax and submitting it to the sate is really not that hard. It can be daunting to look at if you have never done it before, but you can do it. I PROMISE! If I can do it for a car dealership and repair shop, you can do it. There are so many taxes and fees that affect a dealership and repair station that it's scary. Photography is pretty simple and easy.

So, what do you charge tax on? Everything? That's the complicated part. It all depends on where you live. Some states tax the service you provide (session) AND goods. Some states tax goods only. Some states tax the service IF it becomes a tangible good-your session becomes a taxable item if the client buys something. Some states consider images delivered digitally taxable, some don't. Most consider a CD of images taxable as a good, but there are some where it falls into the gray area... You are going to have to get a little education here that I can't give you. There are 45 states and I can't know the sales tax from all of them. Sorry! GOOD NEWS! It's not that hard to find out and get a little help. SBA to the rescue!

Getting a Sales Tax ID is easy and in most cases free. Even if you are just a hobbyist JUST DO IT!!! It's better to be protected and spend a few minutes submitting the payment you collect than to take a chance with your future!

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