My USC partner is selling stuff on the USA etsy site. She doesn't have a main job. She doesn't live off it; it supplements other household income. She lives in the UK. I have looked on the internet for IRS tax procedure/advice for this, but was wondering if anyone else has faced this and how they went about dealing with this? Forms to file, deciding if it's a hobby, self employment tax but not living in US, using tax credits from previous UK employment etc. It's not a lot of money. Will the IRS actually care?
Thanks.
The IRS always cares about taxable income. Even if not from a business, the income still has to be reported. Perhaps the info below will help:
An activity is considered a business if it is done with the expectation of making a profit, while a hobby is considered a not-for-profit activity.
The IRS uses a list of factors to determine whether an activity meets the criteria of a business, making determinations on a case-by-case basis.
If the IRS determines that an activity is not-for-profit (a hobby), its expenses can't be used to reduce other income for tax purposes.
Hobby income can not be deducted as a miscellaneous expense.
IRS Nine Factors Test
The IRS has a list of nine factors to be used in determining whether an activity is a legitimate business or a hobby, considering each case on its own merits:
Do you keep good business records, have a business checking account, and generally run your activity like a business?
Do you put time and effort into marketing and other activities to bring in customers?
Do you depend on the income from this activity for your livelihood?
Are your business losses beyond your control or typical startup losses?
Have you changed methods of operation to be more profitable?
Do you have business expertise and hire competent business advisors?
Have you been successful in similar businesses in the past?
Do you make a profit and how much?
Can you expect to make a profit on assets used in this activity in the future?3
Some types of income have greater potential to be hobbies, and the IRS looks at them more closely. These activities include fishing, craft sales, dog breeding, horse racing, photography, and writing. See
https://www.irs.gov/newsroom/heres-what-taxpayers-need-to-know-about-paying-taxes-on-their-hobby-activities I have "income" in the form of free goods provided by an online entity in return for written reviews of the products. Because I only do this now and then, and consider it a hobby, I report it as hobby income. I am taxed at the "fair market value" of the items. That is, if I receive an item worth $100 on the market, I pay taxes on that $100 to the IRS. The info goes on Schedule 1 of the 1040 form. I would assume (although I'm not a tax lawyer) that your partner would be reporting their Etsy income on that form as well. Again, assuming, does Etsy send a 1099 or other document to your partner (required if the income is over $600 in the year, I think)? If so, the IRS definitely knows she's earned some money, which isn't too much hassle if it's a hobby only.
But if it's a business - that brings in self-employment taxes, SS tax to be paid, etc. Quite a can of worms, really.
I'd actually be more concerned with how to report it to HMRC. If it's a business she's been conducting while living in the UK without registering it as a business.... Yikes! Someone more knowledgeable on UK taxes will have to chime in on that. If it's just a hobby, I would assume (but am not positive) that it would be reported on a self-assessment.
Good luck.
