Whether you’ve been knitting, painting, creating pottery or making jewelry, you may find that your hobby has become more than that, and you are starting to make money. The rise of websites such as Etsy, Artfire and other craft and hobby blogs, have made it easy to sell your products and wares online. Every small business needs to exceed when it comes to accounting and keep records for their taxes. Having a good control of your finances will mean that you are able to grow and expand your small business as you want to.
When does your hobby become a business?
To determine whether your hobby is a business, the IRS will ask a series of questions. The two most basic questions are:
1. Are you putting in the effort and time with the intention of making a profit?
2. Are you relying on the income from the hobby/business?
It is important to establish this, as running a business will mean that you can offset any related expenses against your profit when you are declaring your small business profits. These deductions can include materials that you have used as well as a deduction for use of your home space for your business. If you are turning your hobby into a startup, you need to keep a firm track on any deductions you want to make. This will help you with your taxes.
Keep a separate bank account
In order to keep your accounts and taxes simple and transparent, it is a good idea to open a new bank account for your small business. This will help you see when you’re spending on your own personal expenses and help to ensure that you aren’t making any tax deductions that aren’t related to your business. Industry professionals GR-US.com suggests keeping a separate bank account to help maintain a positive cash flow. If the IRS wants to request an audit or look further into your accounts, this will make life easier. It also looks more professional, especially if you are requesting direct bank payments from customers.
Use a software accounting package
Investing in a good software accounting package (like Clever Accounting) for your business is a must. This will help you to keep track of your cash flow and expenses. It will also help you to accurately invoice customers and the payments they have made. Using a good accounting package can help transform your hobby business into a thriving enterprise, giving you the time to focus on your products and services.