Many successful businesses are born out of hobbies. You may have a hobby you enjoy that could potentially become a lucrative business. You may have an idea for a product or a craft that you believe would be beneficial to others. If you choose to move forward with your hobby business, you will need to do some research to ensure the business is legit, which includes taxes.
Before you convert your beloved hobby into a business, you must make sure you fully understand your responsibilities when it comes to taxes. Here are some things you need to know:
Setting Up Your Hobby Business
When you decide that your hobby may be a good business venture, you need to set it up properly. This not only helps you remain organized, but also ensures you have all the documentation you need when tax time arrives.
You have several options when it comes to setting up your hobby business. The easiest and fastest route is to become a sole proprietor. You do not need to file any documentation to establish a sole proprietorship. You can simply use your own social security number as a tax identification number. As a sole proprietor, you can choose to pay your taxes on a quarterly basis or all at once on the date due date each year. You will need to document the income each month to determine how much you will owe in taxes.
Another option is to set up a limited liability corporation, or an LLC. An LLC is similar to a sole proprietorship in ease of setup, but it also provides you with additional benefits, most notably asset protection. If someone were to sue your business for any reason and they win the lawsuit, the plaintiff can only be paid from the assets held in the LLC. Without an LLC, your personal assets are at stake should you be sued.
No matter which business you decide to set up, it is best to consult with a tax attorney as well as an accountant to ensure your systems are in place to make your regular tax payments.
Taxes Are Necessary for a Small Business
No matter how big or small, all businesses must pay taxes on income generated from the business. Just because you have a small hobby business does not mean you can keep all the proceeds. This is the case even if you only work on a cash-only system. If you do not pay your taxes properly, you could face serious legal repercussions.
Figuring out your taxes can be confusing and frustrating. If you're having issues, consider speaking to your local tax attorney.