Are YOU Writing as a Hobby or a Business?
(This was previously posted at my old site. I have updated some of the information.)
The first question anyone who earns money as a non-employee, not just writers, must ask is - what's the difference between being considered a hobby versus a business? That is indeed what this first blog is about.
But you also might ask - why even bother caring about the difference between the two? Well, the answer to the second question is that the IRS cares about the difference because Congress directed them to care about it.
The fact that you write or that you call yourself a writer (or author) is irrelevant as far as the IRS is concerned. What does matter is whether or not you earn taxable income from your writing or deduct expenses related to your writing from your taxable income. Either of these will impact on how much you do or do not pay towards your federal, state, and sometimes local income tax obligations.
The first place to start to determine if you, Dear Writer, are a hobby or a business is to examine how you are behaving as a writer. Notice the word behavior, a word that implies that you have at least some control over your writing journey, and indeed you do.
So, let's look at how a hobbyist writer behaves.
Ima Hobbyist loves to write but isn't interested in making money from her writing. She mostly writes for herself. She has dabbled in writing the Great American Novel (GAN) but that's just a dream right now. Maybe when her kids are grown she'll take it more seriously, but right now it's just for fun.
In this situation, Ima Hobbyist has no tax obligations because she has not received income nor has she deducted any writing expenses on her tax returns from her taxable income.
Ima Hobbyist's friends found out that she loves to write and one of those friends has a small business and needs the occasional brochure or newsletter written for her business. Ima Hobbyist agrees to her friend's proposal that she become her scribe. Ima Hobbyist knows that her friend is just breaking even on her business so charges her very little for her services.
In the above situation, Ima Hobbyist is still writing as a hobby because she's not charging the fair market value for her services and only occasionally provides written product for her friend. In the lingo of the tax code, Ima Hobbyist is not demonstrating an intent to make a profit - a critical element of behaving as a business, regardless the trade. However, she now has to claim the income on her tax return. She can also deduct her expenses but only as a hobby which has stricter limitations than a business. (Stay tuned for this discussion in a future Blog.)
Ima Hobbyist continues to write for her friend's business but this time she exchanges her writing services for some of her friend's products.
In this situation, Ima Hobbyist is still writing as a hobby but is earning money from bartering and must report the fair market value on her tax return. A future Blog on the different types of income writers can earn, including bartering income is coming.
So, Dear Writer, consider the scenarios above and see if any of them apply to you.
Soon we will discuss how income earned as a hobbyist affects your federal tax return.