Should Part Time Freelancers Run A Business?

As a part-time freelancer, knowing the difference between having a hobby and running a business might seem confusing. And actually running a business might seem unnecessary. The thing is, it's more necessary to have a bona fide business as a part-timer.
Do you wonder if it’s necessary to build an actual business as a part time freelancer?

Does it seem like a lot of work for a part-time pursuit?
 
As a part-time freelancer, knowing the difference between having a hobby and running a business might seem confusing. And actually running a business might seem unnecessary. 

The thing is, it’s more necessary to have a bona fide business as a part-timer.
 
 Why? Because if you intend it as a business and something you want to grow so that you can quit your day job, you have to run it as a business to avoid IRS trouble. 

Why you should build a business

There are good reasons for both part time and full time freelance creatives to do business the right way, to become the owner of a creative business rather than a creative who’s dabbling at business. 
 
Hobbies and businesses are treated differently where income taxes are concerned. 
 
If you’re operating as a hobby, you’re going to be focusing more on the creative and enjoyment than on business activities. If you’re operating as a business, you’re going to make different decisions.
 
The biggest difference between being a hobbyist or a business owner is that businesses can prove a profit motive, while hobbies are for pursued for recreation.
 
In both cases, if you receive more than $600 in a year for goods or services you’re required to pay income tax. 
 
There is a limit on hobby losses. As a hobbyist, your allowable income tax deductions cannot be more than the gross receipts for the activity. For example, if your hobby earns you $650 in a year and your expenses for tools and materials total $1,850 in a year, you can deduct only $650 of expenses on your Schedule A. 
You will also have to declare the $650 as taxable income because it exceeds the $600 limit.

Questions to ask yourself to prove your profit motive:

  • Do you have a business plan? Is it in your head or in writing?
  • Do you have a public-facing portfolio of work to attract clients or customers?
  • Do you engage in marketing activities?
  • Do you carry business insurance — at minimum, professional liability?
  • Do you file a Schedule C and make estimated tax payments throughout the year?
  • Do you maintain a business license?
  • Have you incorporated or formed an LLC?
  • Have you published a DBA (fictitious business statement)?
  • Do you have a resale license and collect sales taxes?
  • Do you have separate bank and credit accounts for your business?
  • Do you have a spending plan and financial records?
  • Does the amount of time and effort put into your business activity demonstrate your profit motive?
  • Have you made a profit from the activity in the past?
  • It is likely you can profit from the activity in the future?
  • Do you have the business knowledge necessary to carry on the business activity?
  • If you’re full-time, does your business earn enough profit to live on?
  • Do you purchase business coaching or have a cadre of business and financial advisors you consult with?

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