Luh Marvin is a member of the Poppinsverse. A car enthusiast, he's been doing oil changes for years. Scat Pack Matthew Stacks aka Matt is familiar with Luh Marvin's game. On a beautiful summer day, Matt invites Luh Marvin over to do an oil change. Luh Marvin obliged and walked home that day with 40 more smackers to his name. While he figured that Matt would slide him some cash for the favor, he wasn't in it for the money. He just likes to do oil changes. Since he received money from Matt for doing the oil change, is he now considered a business owner? Does the IRS consider the activity a hobby? Is Luh Marvin self-employed? Get to reading!
The Small Business Rundown
Kim Mercado of NEXT explains that when you own a small business, you are viewed as running an entity that is separate from yourself. This isn't the case with self-employment, which I'll get further into later. The IRS states that businesses are operated with intent to make a profit. Does this mean that you can't enjoy operating a legitimate business? No. You can enjoy running a business. However, for the source of income to be considered a business by the IRS, it would need to be run with the aim to make a profit. They ask taxpayers to consider multiple factors when filing. One factor is whether profit came in within some years, and if so, what those numbers looked like. If a profit is generated three out of five years, the odds of being considered a business are upped (not to 100%, but nevertheless). Now keep in mind that if a source of income runs losses for five-plus years, that does not automatically prevent it from being considered a business. A legitimate business can have a stinky era. This is something that happens. At the end of the day, a source of income that is not a business might fall into hobby territory.
The Hobby Rundown
A hobby is something that is done for enjoyment. With hobbies, the day isn't a failure if you did not make a profit. If a hobby does make a profit, does it then become a business? Nope. There is a dichotomy between a hobby and a business. Do I need to report my hobby income? You legally do. Sorry pal. There are both pros and cons to running a hobby. A pro is that with hobbies, there doesn't exist a need for a business license. To mix the bag up, a hobby con to keep in mind is that hobby expenses aren't deductible. When you make a deduction, you are lowering the amount of your income that is taxable. Let's say in a fantasy example that after a baller dinner with my coworker, the IRS allowed me to deduct the $100 dinner bill. Since I dropped $100 on something business related, I can take $100 of my income and make it non-taxable. That is a deduction. You cannot do this with hobbies. As for the individuals that came for self-employment info, I didn't forget about you. I got you. You can scroll now.
The Self-Employment Rundown
Earlier I mentioned that a small business owner is perceived as someone who is running a business. On the other hand, you customarily are the business when you're self-employed. Do terms like sole proprietor, partnership and independent contractor ring a bell? Those are like the Tim Duncan, Tony Parker, and Manu Ginóbili of self-employment. How does self-employment look different from a hobby? Unlike hobbyists, those that are self-employed are required to pay self-employment tax. As a jit I still remember bringing 10 sour gumballs to the register, thinking it would not cost a penny over one dollar. Thank you to the Five Below customer who had me on that mistake. You ever been short on change at the register? Drop a comment.
I Hope This Read Wasn't Taxing
Now we can see that Luh Marvin generated hobby income. He did an oil change for his enjoyment. He wouldn't have said a thang had he not been paid. Payment just made his day better. He didn't have a contract to sign, but sometimes life does present contracts.
If you receive a contract, you may feel uncertain about its contents. Don't fret. Poppins offers contract and management services that can help you with that contract. You need that reviewed and negotiated? Hit us. We also offer mock interviews and career plan consultations. Let it linger no Cranberries.
Written by Giuseppe Amato, @giuseppevalentinoamato on Instagram
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Thank you TurboTax for the oil change concept
Thank you peterschreiber.media and Getty Images/iStockphoto for this blog's featured imageÂ
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