Denette

How much money can you make before taxes become an issue?

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This is all hypothetical, but...

Let's say that I've been making and selling projects.  It's all informal, all done in my garage, but people have been paying me.  How much money could I make and still have it count as "hobby income" on my taxes?  I'm a nincompoop when it comes to taxes, so I'm just trying to make sure I choose a sustainable business model.

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Meh.  I'd bet anything you didn't net a dollar of profit after your expenses from tool and materials purchases, etc.  If you're just taking commissions to support your hobby, you're in the gray at best.

I wouldn't even think about filing anything with the IRS until I was in the 10k NET income ballpark in a year.  It's peanuts...no one will know, no one will care.

I'm not an accountant or tax attorney.

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A good accountant or CPA is worth their weight in gold. 

Cpa's know a lot more about the many thousand page tax code than I'd bet anybody on this forum.  Through experience, they have learned how to creatively code different types of expenses a business may have. Many successful business pay very low taxes. 

Cpa's also do not have to be super expensive. My CPA works at a large accounting firm and is allowed to maintain a side book of business which she does during tax season. I think I pay in the neighborhood of $400/year.  When it comes to the. IRS,  go to a pro, ask the right questions. Maybe they will tell you a number for the future.

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I am a CPA and will say the following:

1) the IRS is understaffed and could give a crap less about a couple grand you make selling stuff for cash on the side

2) Eric is right, there is a 0% chance you are actually profitable.  If you want to do things by the book you can file a schedule C listing your income and related expenses.  If you are losing money on the stuff you sell (which you probably are, once you factor in everything from materials toelectricity  to depreciation on your machines) you can use that loss to offset your W2 income. 

3) Schedule Cs are regularly audited.  unless you have a real business with real profits and losses, I would not file a schedule C.   Recurring schedule C losses will attract scrutiny.  

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I think there are some unofficial thresholds. I religiously file my self employment summer income, but it is less than three percent of my annual income. I don't seem to get scrutinized. I think if I made closer to fifty percent or some other magic number, this is what Mike is talking about. The bad part is if you are that random audit and they find your BCTW purchases unsupported by income statements...

Edited to more closely mean what I intended. 

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1 minute ago, C Shaffer said:

The bad part is if you are that random audit and they find your BCTW purchases unsupported by income statements...

I make more than enough with my real job to support my BCTW habit. :)

I figured I should go into see the tax man with my receipts, and file them... I never thought to ask about a threshold of income before I really had to worry about it. 

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Here's my analogy for filing taxes on those little scraps hobby income...

You're driving through a stretch of highway in the middle of the desert in the middle of a Sunday night.  No one else is on the road.  The only cop that patrols that stretch of highway is your wife's brother.  And he's shacked up with some chick he met at the Dew Drop Inn earlier that night.

Do you still go the speed limit?

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40 minutes ago, C Shaffer said:

I think there are some thresholds. I religiously file my self employment summer income, but it is less than ten percent of my annual income. I don't seem to get scrutinized. I think if I made closer to fift percent or some other magic number, this is what Mike is talking about. The bad part is if you are that random audit and they find your BCTW purchases unsupported by income statements...

I would have to check the code and opinion papers but I dont think there are any thresholds.  If your hobby is profitable, it is taxable, full stop.   There is no free lunch.   But paractically speaking the IRS won't be tracking you down over a little bit of hobby income that they don't know exists.   

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5 minutes ago, wdwerker said:

Just keep it all in cash .

Or barter.  "I'll build you this table if you buy me that table saw."

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27 minutes ago, Eric. said:

Here's my analogy for filing taxes on those little scraps hobby income...

You're driving through a stretch of highway in the middle of the desert in the middle of a Sunday night.  No one else is on the road.  The only cop that patrols that stretch of highway is your wife's brother.  And he's shacked up with some chick he met at the Dew Drop Inn earlier that night.

Do you still go the speed limit?

Isn't that really just a question of ethics? I mean, potentially breaking the law, potentially keeping money out of the hands of the government (which one could consider to be stealing.) How come people have no ethics when it comes to taxes but taking leftover concrete from a contractor because you know an employee there is stealing? I mean, just curious how everyone arrives at this. I was gifted with a complete lack of ethics and theorize that a sucker is born every minute, and if you aren't taking advantage of a situation when it's presented, then you are the sucker. The rate I get taxed at is retarded-high so I feel no obligation to report side income - which, I absolutely make none in woodworking - but I do in programming activities.

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2 minutes ago, Cliff said:

Isn't that really just a question of ethics? I mean, potentially breaking the law, potentially keeping money out of the hands of the government (which one could consider to be stealing.) How come people have no ethics when it comes to taxes but taking leftover concrete from a contractor because you know an employee there is stealing? I mean, just curious how everyone arrives at this. I was gifted with a complete lack of ethics and theorize that a sucker is born every minute, and if you aren't taking advantage of a situation when it's presented, then you are the sucker. The rate I get taxed at is retarded-high so I feel no obligation to report side income - which, I absolutely make none in woodworking - but I do in programming activities.

Not really - it is totally different.  Like I said there is 0% chance he is actually profitable so he does not owe the government any money.  He could include all his hobby income/losses on his tax return but it won't change the answer.   In fact he is probably  losing money and could argue it is a business and try to deduct that loss against his W2 income. But that would be ethically dubious and open himself up to an audit.   Hobby losses can not offset ordinary income.  Business losses can.  

But we all know what is happening here.   He has a hobby that is costing him money     In the eyes of the tax code that is called "life" and is a non event.  

 

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Mike, what distinguishes between hobby and business? I have never filed hobby because my hobby is too similar my side job so I file it all as business. It still is not "profitable" but I do wind up in the black each year. 

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12 minutes ago, C Shaffer said:

Mike, what distinguishes between hobby and business? I have never filed hobby because my hobby is too similar my side job so I file it all as business. It still is not "profitable" but I do wind up in the black each year. 

Its not really black or white, but the IRS has published these guidelines.  Basically it is a business if it supports part of your livelihood or are trying to make it profitable.    If you are genuinely trying to make money, you can generate taxable income AND losses.   If you mostly do it for fun, losses are not deductible but income is taxable.   

https://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Small-Business,-Self-Employed,-Other-Business/Income-&-Expenses/Income-&-Expenses

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1 hour ago, Cliff said:

Isn't that really just a question of ethics? I mean, potentially breaking the law, potentially keeping money out of the hands of the government (which one could consider to be stealing.) How come people have no ethics when it comes to taxes but taking leftover concrete from a contractor because you know an employee there is stealing? I mean, just curious how everyone arrives at this. I was gifted with a complete lack of ethics and theorize that a sucker is born every minute, and if you aren't taking advantage of a situation when it's presented, then you are the sucker. The rate I get taxed at is retarded-high so I feel no obligation to report side income - which, I absolutely make none in woodworking - but I do in programming activities.

 

1 hour ago, Mike. said:

Not really - it is totally different.  Like I said there is 0% chance he is actually profitable so he does not owe the government any money.  He could include all his hobby income/losses on his tax return but it won't change the answer.   In fact he is probably  losing money and could argue it is a business and try to deduct that loss against his W2 income. But that would be ethically dubious and open himself up to an audit.   Hobby losses can not offset ordinary income.  Business losses can.  

But we all know what is happening here.   He has a hobby that is costing him money     In the eyes of the tax code that is called "life" and is a non event.  

 

 

Yep, what Mike said.

Laws aren't made in a vacuum and are mostly created to protect one person from another person or one group of people from another group of people.  If there's no one else on that road for a driver to harm, what's the point of the speed limit and how is it ethically dubious to ignore it?

The point is, if someone is in the RED after a year of "supporting" their hobby by taking some commissions, they are not obligated IMO to tell the IRS about it since they made no money.  It's not so much a matter of ethics, but rather a matter of practicality and avoiding complications that are totally unnecessary.  And ethics in tax code is a whole other wormhole anyway...and way too political for this forum.

If a hobbyist finds himself significantly in the BLACK over the course of a year, he's no longer a hobbyist, he's a professional with a business and it's time to file some forms.

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My accountant says pretty much the same as Mike is. You can make your hobby a business but after so many years of losses that reduce your W2 taxes the IRS will start to care. 

4 hours ago, Eric. said:

Or barter.  "I'll build you this table if you buy me that table saw."

"Mom I'll build you new tops for your tables if you buy me that SawStop"

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6 hours ago, Eric. said:

If a hobbyist finds himself significantly in the BLACK over the course of a year, he's no longer a hobbyist, he's a professional with a business and it's time to file some forms.

Ahh got ya. I thought you were indicating up or down, no tax reporting. 

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On December 27, 2015 at 11:36 AM, Eric. said:

Here's my analogy for filing taxes on those little scraps hobby income...

You're driving through a stretch of highway in the middle of the desert in the middle of a Sunday night.  No one else is on the road.  The only cop that patrols that stretch of highway is your wife's brother.  And he's shacked up with some chick he met at the Dew Drop Inn earlier that night.

Do you still go the speed limit?

Consideration should be given as to whether BIL was on duty at the time and if so, he was getting paid to get laid. If so, then a seperate W-2 should be filed and you can go as fast as you like.

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30 minutes ago, K Cooper said:

Consideration should be given as to whether BIL was on duty at the time and if so, he was getting paid to get laid. If so, then a seperate W-2 should be filed and you can go as fast as you like.

But if he was paying for it,  could that be deducted? 

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On 12/27/2015 at 9:28 AM, Llama said:

I make more than enough with my real job to support my BCTW habit. :)

I figured I should go into see the tax man with my receipts, and file them... I never thought to ask about a threshold of income before I really had to worry about it. 

OK I need to display my ignorance! What is BCTW???

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57 minutes ago, Strasberry said:

OK I need to display my ignorance! What is BCTW???

Bridge City Tool Works - http://www.bridgecitytools.com/

Founded by an engineer.  They make some very nice tools.

Like this dual angle block plane http://www.bridgecitytools.com/default/tools/planes/block-planes/hp-9-block-plane/hp-9-dual-angle-block-plane.html ($399)

HP-9 Dual Angle Block Plane

And occasionally some unusual things, like this for making chopsticks: http://www.bridgecitytools.com/default/tools/kitchen/chopstick-master/chopstick-master.html ($359)

Chopstick Master

 

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6 hours ago, sjk said:

Bridge City Tool Works - http://www.bridgecitytools.com/

Founded by an engineer.  They make some very nice tools.

Like this dual angle block plane http://www.bridgecitytools.com/default/tools/planes/block-planes/hp-9-block-plane/hp-9-dual-angle-block-plane.html ($399)

HP-9 Dual Angle Block Plane

And occasionally some unusual things, like this for making chopsticks: http://www.bridgecitytools.com/default/tools/kitchen/chopstick-master/chopstick-master.html ($359)

Chopstick Master

 

The block plane is on pre-order, and should be shipping soon! 

Important to note, if you become part of the "founders circle" you get 10% off of everything they sell. 

 

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