Tax Reporting Requirements for Hobbyists and Craft Businesses
Other than tax and accounting professionals, nobody gets excited about taxes. If you do crafts as a hobby or run a small craft business, it’s not only important that you have a good understanding of tax reporting requirements but also crucial that you pay taxes as well; it will save you a lot of trouble later down the line.
What qualifies as a hobby for tax purposes?
According to the Internal Revenue Service (IRS), a hobby is recognized as something that you do that is not meant for profitability, whereas a business is considered as an entity to make a profit.
Does hobby income need to be reported?
Yes, there’s no minimum income amount to report on taxes. So, even if you only sold 5 pieces of handmade goods during the tax year, you are required to report that total income amount. Hobby income is treated as “other income,” which goes on line 21 on Form 1040. Keep detailed records of income activity for the year in case there are questions and concerns.
Are there hobby expense deductions?
Unfortunately, because a hobby isn’t a business, you can’t deduct hobby-related expenses to offset total income.
Craft business tax reporting requirements:
A business exists to make a profit, so income from business activity has to be reported. As with a hobby, there’s no minimum income amount required to report. However, because this is a business, you are allowed to deduct expenses. Tax form types depend on the business entity and tax structure. While a Schedule C is typically for sole proprietorships, corporations use Form 1120. S-Corporations use Form 1120S and also must file a 10-K for shareholders. To learn which expense deductions are allowed, please view Publication 535 on the IRS website.
What if my business didn’t make a profit during the first year?
The IRS allows a business to report a net loss for 3 out of 5 years of existence. If a business attains a loss for more than 3 consecutive years, the IRS considers your business a hobby.
What is a 1099-K, and what should I do?
A 1099-K is provided to e-commerce sellers. It’s the total credit card sales from third parties (Square, Stripe, Amazon, Etsy) made during the tax year. The minimum required total sales amount from a single platform is $20,000 with at least 200 transactions. If you sell handmade goods on multiple platforms and you made less than $20k, you will not receive a 1099-K. A 1099-K is kept for your records, but it’s good to verify the total sales against what your bookkeeping records show. If there’s a discrepancy, that’s a good way to find out.
In a nutshell, you must report income from hobbies and businesses. Good recordkeeping is highly suggested, regardless if it’s a hobby or business. Thanks to the advancement of technology, you can easily upload receipts, confirmations, and other source documents to a cloud file.
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