Last year, did you open a new Rodan + Fields skincare consultancy or Young Living business to earn some extra money? Were you surprised to receive a 1099?
When you receive more than $600 in compensation or make purchases of approximately $5,000, you will receive a 1099-MISC. If you have not received a 1099 in the past, you need to be careful because misinformation abounds on the internet.
Is it a business or a hobby?
Do you plan to write off losses against other income? For those with a side-line business, take care and learn the rules.
The hobby loss rule is found in Section 183. If the Internal Revenue Service audits your claimed deductions and finds that your business is in fact a hobby, it could result in an audit with assessed back taxes, interest and penalties.
What makes a business? It is the "intent to make a profit" and a nine factor test used by the IRS to separate a business from a hobby. Some of those nine factors include:
- Are you keeping accurate records with an eye toward improving year-to-year performance?
- How much of your personal time are you devoting to the activity?
- When do you expect to start showing profits?
- Do you enjoy the activity - are you only marketing through Facebook and cocktail hours?
When offsetting losses from a second job against your day job, you need organized books that show your intent to grow the business. Showing losses for several years is indicative of a hobby. There is a serious potential for significant back taxes if you have made a mistake.
If you receive a notice of intent from the IRS regarding an audit of your sideline business or 1099 deductions, consult a tax attorney. Remember the IRS does not contact you out of the blue by phone. Initial correspondence is always through the U.S. mail.