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Hobby or Business – Which Is Better For Me?

If you produce hobby income, you can only deduct a tiny portion of your expenses as part of miscellaneous itemized deductions on your tax return. Because most folks take a standard deduction allowed by the Internal Revenue Service and don’t itemize, they don’t even get this small amount. In other words, you declare hobby income without the benefit of deducting expenses the way a for-profit business does.

Take a look at the 60 Minutes report on the Internal Revenue Service. According to the their Commissioner: … enforcement efforts have been hampered by cuts to its budget. A number of fixes are under consideration,… including delaying the payment of refund checks until they can be matched up with W-2 forms filed by employers. Can you believe that the Internal Revenue Service does not yet match your employer’s records with the wages you declare on your return? So, don’t lose a lot of sleep over the small amount of money that you make at a craft show.

Many people do crafts, knowing they need to keep their day job. What happens if, after a while, your hobby makes more than your day job? It doesn’t cost much to start a business and begin reducing your taxable income by taking deductions. The Internal Revenue Service puts up a red flag only if your business doesn’t show a profit in 3 of the last 5 years of doing business. Consistent losses can mean you are looking for deductions rather than a profit.

When is it appropriate to start a business? The distinction between hobby and business is the profit motive. Are you interested in making money? Do you want others to see you as a business? Five key things that the Internal Revenue Service looks at are if you have all or most of the following.

They like you to have a business card with a business name, even if it is Jane Doe’s Crafts, along with a business license registered with your state. You can do business cards on your home computer. The paper that you buy is a deductible expense, as is the mileage to go get the paper. For about $20 you can register a trade name in Colorado and renew it each year for $5.

A set of books that you maintain and keep current shows you are watching the bottom line and thus, wanting to make money. Bookkeeping does not have to cost anything at all. Use a ledger sheet with dates in one column and a list of income and expenses in columns across the top and do it by hand. Total it all up each month, see if there is a profit, and start another month with the same headings. This is easy to do with spreadsheet software, like Excel, that may have come with your computer or be free online.

A separate checking account for the business shows you are taking the accounting seriously and tracking both income and expenses. If you have an established relationship with your banker, you should be able to set up a business checking account (Jane Doe’s Crafts) for free, even if you must keep a minimum amount in it.

Crafters must collect sales tax when their items are sold, thus a sales tax license also adds legitimacy to the business. A 2-year sales tax license is $16 in Colorado. If you sell only in the fall at craft shows, you may get by with a “use tax form” and not need a license. But serious businesses also sell from online websites. The amount of money you bring in determines whether you will have to file quarterly or monthly sales tax as your business builds. If you pay at an event to please local agencies using a “use tax” form, remember not to double pay when you file your business sales tax return. (If your sales tax rate is 8%, you will have to sell $12,500 worth of crafts to owe $1000 in sales taxes. Remember sales tax is what you collect from customers. You are only the temporary keeper of the sales tax money that you take from customers and give to government agencies. It is spent locally, so everybody benefits.)

Finally, the Internal Revenue Service likes to see proof that you are marketing the business to others, whether through fliers listing upcoming shows or a website that allows others to contact you or buy your items.

More paperwork comes in the form of the dreaded quarterly estimated tax. You might be able to avoid this by going to zero deductions on your paycheck from your day job. That means your employer takes out a little more each paycheck, which might be enough to cover your estimated tax. Now you know why those ledgers (income and expenses) are important to track. The first year of business is difficult to predict, but it is best to overpay Uncle Sam, then underpay. You can print off the estimated tax forms online and pay a small amount each quarter. You could also have your spouse go to zero on his/her wage deductions.

The amount you owe will surprise you, because as a business owner you are an employer (of yourself) and you have to pay the social security tax that employers pay (also known as Self Employment Tax or 7.65%). A good way to estimate what you will owe is to apply the same tax rate you pay now and add 7.65% to it in the first year of the business. Say you and your spouse made $60,000 last year (use the adjusted gross income figure on your return). You paid $8000 in tax, but you got a $3000 return. Divide the net tax (8000 minus 3000) or $5000 by your $60,000 income and this will give you a tax rate you can use (8.3%). Add in 7.65% for social security. Thus, 16 to 17% is a good estimate of what your tax rate on your new business will be. Recalculate your tax rate in year two and that 7.65% should be included in your tax rate equation. Talk to a professional to verify this figure, as your tax can be very different from year to year. The good news is if you overpay, you get a bigger return, which you can apply to your estimated tax for the following year.

All of this might sound involved, but it doesn’t have to be. If you do your own taxes, you already know whether or not you get a large return at year’s end. If you do, then chances are you are covered for the meager income from your crafting business. If you owe taxes with your return and you decide to go for a business rather than a hobby, then you need to look things over more closely.

Here is an important factor to think about when considering going from a hobby to a business. If your craft is hobby income, you virtually cannot deduct expenses. Would you rather pay 8.3% on hobby income of $12,500 or would you rather pay 17% on business income minus business expense (let’s say a net return of 30% on your business after deducting expenses or $12,500 times 30%) or $3750 of net income. That is, would you like to pay $1038 hobby income tax or $638 business income tax? Again this is very simplified and not professional advice, but it might be worthwhile to take a look at how much income you are making off that hobby, track what it is costing you in materials and trips to the post office, supply shop, etc. and whether or not it is worth it to you, given the requirements (paperwork mostly) to start a business.

How to Develop a Successful Business Plan for a Startup Despite a Low Budget

Do you already have a business idea or concept but confused about how to transform it into that ‘megabusiness’ of your dream? Have you been ruminating over what business to venture into despite limited funds to usher you into the desired financial breakthrough? Or you have a low budget for that new business and don’t know how to make it work? Do you fall into any of the aforementioned categories? Then this write-up is for you.

The good news is that a limited takeoff capital is not as much of an impediment to succeeding in a new business as a lack of ideas, thorough planning and a motivation for success.

Sadly, countless businesses have failed to thrive because of the erroneous impression that a robust starting capital is all there is to floating a successful business. But they got it all wrong!

Henry J Turner, Executive Director of Small Business Development Centre Network at Howard University says, “Don’t start until you have a business plan. The reason a large number of small businesses don’t survive beyond three years is the lack of financial planning.” Hence, if you are willing to start a business that will be sustainable in the long-term, having a good business plan will definitely not be a bad idea!

What exactly is a business plan? What are the potential benefits? How can you develop one? These are some of the questions this article seeks to address with a view to giving you the necessary edge over competitors.

Simply, a business plan is a written document that gives a vivid description of your business. Arguably, the potential benefits of a well-developed business plan cannot be overemphasized.

1. It helps to clarify your business ideas and define your goals and objectives.
2. It provides a road map for running the business.
3. It serves as a template for progress evaluation.
4. It helps with obtaining bank loans or financial support from investors.

A top-notch business plan will usually contain the following sections:

1. Executive summary: This part of the business plan highlights your product (and what makes it special) and features identified market opportunities, funding requirements and expected returns. If you are interested in financial support, then this section must be enticing.

2. The Business: Here, you need to give background information about your business idea in terms of how long you have been nurturing it, how much is on ground already, the proposed ownership structure and any relevant experiences you may have.

How will your product stand out? What do customers stand to gain from patronising you?

3. Markets and Competitors: This is where you focus on your target customers and why they should patronise you and not other competitors in the market that render a similar service or sell similar products.

4. Sales/Marketing: How do you intend to meet specific customer needs? What marketing strategies do you plan to employ? For instance, flyers, posters, internet via websites, blogs, social and print media and so on.

5. Management: You are to outline the management skills within your team, stressing areas of strength and weakness. It also includes the proposed remuneration of team members.

6. Operations: What facilities will your business need? For instance, if you are considering going into web design, all you need may just be a good computer with reliable internet connection and you can work from the comfort of your room.

7. Financial forecasts: This is where you reel out the figures – a cash flow statement showing how much money you expect to flow into and out of your bank account and when you expect your business to break even.

8. Financial Requirements: Here, you are to state how much funds your business requires and the likely source(s) of funds – bank loan/overdraft, personal savings or support from investors. State what the funds are to be used for ranging from procuring equipment, debt financing to advertising.

http://www.prosper.com is a tested source of microloans.

9. Risk assessment: It is very important to help minimize problems in the event that something goes wrong. It also gives credibility to your business.

10. Appendices: In this section, you may include other relevant information like detailed CVs of key personnel (especially if you need external funding) as well as market research data and product literature.

In conclusion, although the task of developing a sound business plan may appear daunting, it is usually worth the effort as it keeps your vision clear, helping you maintain focus on key areas of the business all the way.

It’s high time you unleashed that business idea of yours and who knows? It may just be the next big thing. Welcome to the business world!

Why Business and Law Go Hand in Hand

If you are getting ready to start a new business, or if you have already done so, it is important that you understand the areas where business and law intersect and rely on one another. There are a wide variety of potential legal situations that business owners might find themselves in when starting a business or growing an existing one. Because the average person might not be aware of the minute details of business law, they could end up facing severe financial consequences.

The best way to properly protect yourself from legal liability is by hiring or consulting with a business lawyer. However it is also important that you learn about the general concepts of business and law, so you will be able to know when you need legal protection. If you want to adequately protect yourself and your new business, here are some things you should understand about business and law, and why the two should go hand-in-hand.

Starting a Business

Starting, running or growing a business can be a very exciting venture. Unfortunately many people are so eager to get up and running that they often overlook very important legal aspects of starting their business. And because of the nature of a new business, even if legal issues are known, the business owners might not have enough financial resources to obtain legal assistance.

No business is exempt from the potential of being faced with some common legal problems, including discrimination or harassment claims, dissatisfied customers, patent or copyright issues, disgruntled employees, and many other legal issues. If large and small companies alike do not have the help of experienced business lawyers on their side, they could end up mishandling certain situations and facing disastrous consequences. Even seemingly minor legal issues could quickly spiral out of control if they are not handled properly by someone who is familiar with the ins and outs of corporate law.

Even the most optimistic business owners can find their lives turned upside-down by a single harassment claim by a disgruntled employee or a claim of errors and omissions by a customer. In some situations, business owners may unwittingly admit to something they are not guilty of just to calm down an angry customer or employee.

These risks should not dissuade people from starting businesses, but should instead serve as examples of what could occur if the proper precautions are not taken.

Legal Considerations

When you start a business and are offering goods or services to a particular market, there is always the possibility that a transaction could go wrong, that a customer or employee could feel they have been wronged, or that a contractual agreement may fall apart. In these situations, it is crucial that you and your assets are protected. An important step in running a business is choosing the proper legal entity that it should be. Different entities have different levels of protection, shielding individuals from liability, offering different tax benefits and establishing roles between partners. Another step in protecting yourself is obtaining and implementing the proper type of insurance, that might be relied on if a particular dispute arises.

Other legal considerations of running a business involve the use of clear contracts between you and those you do business with. One of the biggest causes of business disputes is where two parties are involved in a business arrangement, end up disagreeing what that arrangement is, and either have an inadequate contract, or no contract at all that describes each of their obligations. Individuals and businesses can lose large amounts of money simply because they failed to properly define their legal obligations and put a contract in place.

Business Attorneys

At any time during their operation, both small companies and large corporate entities can be faced with unexpected legal issues that they are simply not prepared for. One of the best ways to prevent such dangers, and to protect yourself if a dispute arises, is to hire or consult with a specialized business lawyer.

A lawyer who is experience in the areas of business law will be able to help you avoid potential liability in the future, and can help defend or enforce your business against others if a dispute arises. If you want to make sure that your company is able to reach its full potential without being sidetracked by legal problems, you can significantly increase your chances of success by hiring an experienced lawyer.

As long as businesses continue to exist, there will always be the need for competent legal protection. Make the smart move for the future of your business by hiring a qualified lawyer to make sure your company is always represented and prepared for unexpected legal situations.

Business and Law

The areas of business and law are intrinsically connected and will always go hand in hand. Our legal system has many regulations and laws in place to govern those operating a business, and it is important to have at least a basic understanding of the legal implications of starting a business. With a little research, basic knowledge, and ideally help from specialized business litigation lawyers, you can continue to grow your business while implementing best practice strategies, and protecting yourself, employees and customers at the same time.