A hobby that makes money
Pat has a hobby that has begun earning money. She asks Dave if it's time to consider her artwork a business.
QUESTION: Pat is having some financial success with her hobby. She asks Dave when she should look at officially starting a small business.
ANSWER: I’d go ahead, and do it now. A hobby that makes money is called a business.
Starting a small business doesn’t have to be complicated. You can go to your bank, and using your Social Security number, open a sole proprietor checking account. Title the account with your full name, then DBA — doing business as — and the name of your business.
Your art income goes into that account, and any expenses paid where your painting is concerned comes out of that account. After the income goes in, and the expenses come out, what’s left is profit. That’s what you’ll end up paying taxes on.
You’ll be required to do quarterly estimates and send them to the IRS if you make more than $640 in a quarter. Always remember to always hold back 25 percent for taxes, too, in a separate savings account just for this purpose.
This is cool, Pat. I think you’re on the verge of being very successful!