I frequently hear people say things like “I just do this as a hobby,” or “I was told that if I make less than x dollars this is just a hobby.”
“Hobby” has a different meaning in a tax context, a legal context, and in a non-tax/legal context. We all understand the colloquial and dictionary definition of a hobby, so we will skip that bit. You’re here for the fun part anyhow right? Taxes and law!
Let’s start with the “why.” Why does it matter if we call your endeavor a hobby or a business? Answer. They are taxed differently. Also, hobbies may require less business structure.
HOW IS A HOBBY TAXED DIFFERENTLY THAN A BUSINESS?
Business income is subject to both income tax and FICA taxes. FICA is the tax for Medicare and social security. Collectively, I call these self-employment taxes. Federal income taxes range from 10% to 37% based on all income. Self-employment tax is a 15.3% tax on self-employment income.
What's an EIN?
EIN stands for Employer Identification Number. It's essentially your business's social security number. You use it to identify the business.
When Must You Have an EIN
According to the IRS website, you need to have an EIN if you operate as a corporation or if you have employees.
When Should You Have an EIN
I say always. Getting your EIN is super easy. It takes about 5-10 minutes, and it's free. You will need an EIN to open your bank account, and as a sole proprietor or single member LLC owner, you can use your EIN in place of your social security for important documents like W-9s. That means, in short, that you don't need to give your social to strangers.
What Not to Do
Don't pay someone to get your EIN for you unless it's bundled into a full service package. It's super easy. Just Google IRS EIN application and do it for free through their site.
EINs are just one of many applications you need to complete to get your business legit. For a more...
According to the IRS you must file a 1099-MISC “for each person in the course of your business to whom you have paid during the year . . . at least $600 in . . .services performed by someone who is not your employee.” This does not apply to employees.
There is also an exception for payments made to s or c corporations and LLCs that have elected to be taxed as s corporations. Naturally, there are exceptions to this exception. Lawyers must get a 1099 even if they have corporations. There are a couple of other very rare exceptions, which you can find here.
You are also not required to issue a 1099 if you paid the service provider by credit card, paypal, or other “third-party network providers.” Note that credit cards do not mean debit cards. Payments made by debit card are not exempt from 1099 rules as the payment comes straight from your bank and not through a third party.
Wondering why credit card payments are...
You need a contract. I need a contract. We all need a contract. I won’t dwell on that bit. Here’s what I want you to know about a contract. While a contract is a legal document, it need not have legalese. A good contract is a simple contract.
If both parties to a contract don’t understand the terms then it’s a shitty contract. It doesn’t help clearly communicate your rolls. It might still help you in a lawsuit, but it won’t help prevent problems.
Contracts need to be specific and clear. Do me a favor. Have a friend read through your contract. Buy them lunch. Then grill them with questions. When would you pay me a client. What happens if you pay late, or I cancel, or your drunk uncle grabs my butt while I’m in the middle of photographing your wedding?
If you your friend can’t answer those questions. It’s time for a redraft..Ok, we got the intro out of the way. Let’s talk...
There are a few basic elements every contract needs. In this short post, I’m going to walk you through those, so whip out your contract, and a pen, and let’s get to work.
In your contract, you can state when the contract goes into effect. Without explicitly stating the “effective date” of the contract, it will typically be deemed to go into effect on the date of signature. Therefore, it’s good to call out when the contract will take effect. Include an effective date in the introduction.
Use an introduction to give context to the contract. The introduction should state the purpose of the contract, the parties, and the effective date. Use abbreviations for the parties for quicker reference through the contract.
Example: Braden Drake (“Consultant”) will provide tax consulting services and Amanda Montgomery...