The Art of Accounting for Creatives - Hobby vs. Business: Do I really need to do this accounting stuff? I don’t even really have a business yet!

In this blog post, we’re going to address a common question that may have crossed your mind: “When do I need to start treating my hobby as a business?” Well, the answer is simple: Sooner than you think!

The distinction between a hobby and a business can seem muddy, but it’s really not. It really boils down to intent - If you aim to turn your creative passion into a source of income, whether it's a full-time endeavor or a side hustle for now, it's time to shift your mindset and view your art practice as a business. But hey, if you're purely enjoying your art as a hobby without any plans to monetize, then feel free to skip the rest of this blog post. However, if you're even earning a few hundred dollars from selling your art, it's worth reading on! 

So, what exactly differentiates a hobby from a business, and why does it matter?

When it comes to taxes, if you make money from your art, you're obligated to report that income on your income tax return. As a hobbyist, you'll report all of that money as income, but unfortunately, you won't be able to deduct any hobby-related expenses thanks to the tax reform in 2018. However, as a legitimate business, you can report both your income and expenses, which allows you to calculate your net profit or loss for your income tax return. Let's break it down with an example:

Imagine you participate in a craft fair and you make $500 in art sales. If you consider yourself a hobbyist, that entire $500 would be taxable to you as “other income” on your income tax return. However, let’s say you had to pay $50 for the entrance fee for the art fair and it cost you another $150 in art materials and supplies for the art that was sold. As a business, you can deduct these expenses and only the net $350 profit would be taxable to you. Assuming your effective tax rate is 20% (federal and state), you’d end up paying $30 more in income taxes as a hobbyist than as a business owner 

So, in considering whether you have a hobby or a business, take some time to reflect on your ultimate goal. If you aspire to make money from your art, no matter how modest or grand, it’s time to start thinking like a business owner!

Stay tuned for my next post where we’ll explore the steps to form your creative business, bringing us one step closer to our dream of turning our passion into profit! Until then, keep painting the world with your brilliance!

Get your TOP 10 Tips for Starting Your Successful Creative Business HERE!

 

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The information contained in this blog is for educational purposes only. It is not intended to be relied upon as accounting, legal, or tax advice. Laws are subject to change and the content included in this blog may not reflect all changes to date. Please see full disclaimer here.

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