Tax Tips Part II
Professional Dance Business Tax Tips
Part II: When is Dance a “Hobby?”
by Ma*Shuqa Mira Murjan
Having completed her MBA, Ma’Shuqa Mira Murjan now divides her time between her career as a university professor of business, her work as a business consultant, and her performing, teaching and continued study of Oriental dance. She is currently pursuing a Ph.D. in Educational Administration. www.mashuqa.com
Included in the first article in this series on professional dance business tax tips was a definition of a professional dancer as one who is employed in the field of dance as: a dancer in performance; a teacher; a publisher of periodicals or books; a coach or judge; a consultant to others in the profession; or a sponsor or teacher of workshops and seminars. This article builds on this definition, discusses the difference between being an employee and being self-employed, and defines “business” as opposed to “hobby” for the purpose of writing off losses.
Employee vs. Self-Employed
Professional dancers’ employment as a dance professional may be classified as either self-employment or self-employment as an outside “business” activity. If your outside “business” activity, such as dance instructor, coach, judge, photographer, or writer, produces income, it becomes taxable along with the rest of your dance performance and other income. Income earned is considered self-employment income when it is earned when you are working for yourself, or is received from a corporation which you own. You are considered a self-employed professional if you contract out your services to an employer.
However, you cannot call yourself a private contractor (vs. “employee”) just because you and the party engaging in your services so agree. There is a body of law defining when a person is an employee, and when she is a private contractor. An employee is one who performs services subject to control by an employer “not only as to the result to be accomplished by the work, but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what is to be done, but also as to how and when it shall be done.” There may be specific IRS guidelines which apply to your case, and the particular circumstances of your situation will determine your status. The IRS has a special questionnaire for the purpose of determining classification.
The IRS generally prefers individuals to be categorized as employees rather than self-employed persons, because it is easier to tax an employee since wages are automatically reported on Form 1099. The IRS tends to target tax returns for audit on which only one employer reports self-employment income on a Form 1099, since it would appear that the individual is “working for” that one employer, rather than providing services to a number of people as is common in most self-employment situations. Employers are only required to report income of $600 or more on Form 1099. Therefore, in order to be considered self-employed, it would be helpful to receive at least $600 in self-employment income from more than one employer, or ask another employer to file a Form 1099 even if you earned less than $600. This will help to clarify your self-employment status, and possibly help you to avoid an audit, because it would be clear that you are not just working for one employer.
A 1983 Court of Appeals decision ruled that self-employment depends not on “the number of clients or customers an activity generates, but the nature of the activity that produced those clients or customers.” A consultant should have a high degree of independence in her work in order to be considered self-employed rather than an employee. According to recent IRS rulings, if a consultant does not advertise their services and has no investment in equipment used for business, then he or she is not a private contractor, but an employee. Self-employment status can be demonstrated by advertising, maintaining a business directory listing, sponsoring professional activities, defining oneself as a business through the use of business cards, stationary, and checks with the business name on them, etc.
Business vs. Hobby
If you operate at a loss, your business may be defined as a hobby, in which case you do not qualify for business expense deductions. Therefore, it is important to know the IRS definition, categorization and review criteria targeted by audits for self-employment. A business activity is one engaged in with the objective of making a profit. If you do not make a profit you must be able to demonstrate that objective in order to be considered a business so that you can take deductions for your losses. The law contains a provision that an activity will be presumed to be a business activity if it has produced a profit in three of the preceding five years.
There is no automatic presumption of a business activity. The principal indicator is the manner in which the activity is carried out. The IRS examines the following factors in order to determine if an activity is a business versus a hobby:
A. Has the activity been carried out in a businesslike manner, e.g. have appropriate records, receipts, etc. been kept?
B. Does the taxpayer have enough expertise to run a profitable enterprise?
C. Has enough time and effort been expended in carrying on the activity?
D. Has the taxpayer been successful in other business endeavors?
E. What is the past history of profits or losses from the activity?
F. What is the taxpayer’s financial status, e.g., does she need to earn a profit, or is she looking for a tax write-off instead?
G. Have there been any profits earned in the past or can assets used in the business be expected to increase in value?
H. Are there significant elements of recreation or pleasure involved?
If you are trying to qualify a money-losing activity as a business, you should be especially careful to conduct yourself in as business-like a manner as possible. Any of the following would be helpful, and are the norm for operating a business:
1. Estabish a separate bank account for the activity (in order to prevent co-mingling of funds and to keep business and personal accounts separate).
2. Advertise your services and products to the public.
3. Consult financial or other experts for the purpose of setting up a profitable operation (retain an accountant).
4. Subscribe to publications and join professional associations to stay abreast of developments in the field.
5. Keep business-like records of income and expenses.
6. Write down a projection showing how you anticipate future profits (a spreadsheet business plan and strategy, including depreciation write-offs for equipment and costuming) from a business plan.
7. Operate the activity under a trade name, take out a D.B.A. (doing business as) business license in your city and county, put your stage name on your passport as an A.K.A. (“also known as” — allowing you to cash checks in that name).
8. Have business cards and stationery printed with your stage name and/or the name of your business.
9. Contact the Board of Equalization of your state to obtain a resale permit, if you conduct retail sales and pay appropriate State and County sales taxes.
10. Take out business insurance to cover your equipment (and costumes).
If you are performing services for a fee and are not an employee, then you are automatically operating a sole proprietorship. If you share business decisions, liabilities and profits with another person, you are in a partnership. If you have incorporated as a legal entity, with stockholders, then you pay tax as a corporation.
However, note that you must be very cautious in deducting dance business expenses that would be a greater amount than you earn from dance. To do so might cause an IRS audit to determine whether the business and the deductions are justified as a viable business by your records.
This series of articles on taxation and dance business expenses is designed to assist U.S. citizens in managing the reporting and recordkeeping required by the I.R.S. For specific tax questions that you may have, I direct you to ask your tax attorney, tax preparer, business accountant, or your helpful IRS agent.