Hey streamers, are you running a hobby or a business? I recently wrote an article for StreamerSquare discussing how to prep for the Twitch Affiliate program. In it, one of the major steps was deciding your streaming was a hobby that you did for fun or a business that you intend to grow and derive income from. Why is this important? There are some tax implications but there are much, much bigger goal oriented reasons. Let’s get in to it.
Hobby
It’s awesome to have a hobby. They’re great for relaxing and you can learn some useful, fun skills from them. If you’re planning on streaming being a hobby there are some practical steps you should take.
First, you may want to consider not putting donation buttons on the screen or signing up for something like GameWisp. Those tips and GameWisp subs can cause some real annoyance come tax time. If you think you’ll earn enough that you actually find it worth worrying about it then you might consider the business route.
Next, you may want to decide on a healthy limit of how much time you spend on your hobby. It’s a ton of work starting a business and most full time streamers put more than a full time job’s worth of work in to their stream!
Finally, you should consider the biggest cost: the opportunity cost. If you’re running a business you should be tracking a lot of meaningful stats about your business and seeking to improve them. You should be investing in things that will help the business grow, even if that means you’re not making any money for a while. Those don’t tend to be cheap! With a hobby, you can be more relaxed and hopefully less stressed. In fact it should be relieving stress.
Business
A business is its own separate entity with the goal of making money by delivering value. In this case your stream is delivering entertainment value and perhaps some community/social value. While there are a lot of pros to running your own business there are some certain cons as well.
First, you’ll likely be putting in more hours than you would at a full time job. Also, if you’re not able to separate work and play well you might be thinking about your business at all hours. This can be especially hard since you’re often working from home meaning you don’t even have your environment shift when it’s time to have fun.
Next, you need to track everything. This is because you need to be working to improve your business all of the time and it’s hard to know what to tackle next unless you have data. It means getting an accounting system for your finances, something like SocialBlade for data on your stream, tools like Hootsuite or Tweetdeck for social media, and many other metrics. This improvement mindset is key to your business- you need to work on the business as well as in the business. I’d highly suggest reading The E-Myth for some great insight on working on the business.
Finally, you need to invest in a business. They don’t tend to start out making tons of money but they always take money to run. In fact, it could be that your initial investment (better computer, games, lighting, camera, mic, studio setup, capture card, etc.) costs more than what you make for quite a while. Therefore, you need to have it together and a solid plan for moving forward when you start! You really, really don’t want to spend a ton of money only to find out that you don’t like streaming as work but just as fun.
With most businesses you need to be looking forward at what is the next big investment that will take the business to the next level. While you should strive to be practical on those investments if you’re anything like me it will still hurt to spend a bunch when the business is new and cash strapped. Still, it’s probably the right call.
Tax
The IRS also cares about whether you have a hobby or a business. That’s because there are some great tax benefits you get from running a business. They don’t want those to extend to everyone. The major one that the IRS cares about is that if you’re running a business and have other income your business losses can offset your other income. That means if you spent a bunch of money on initial business costs like we described above you could at least get your taxes reduced by those business expenses.
Here’s what the IRS uses to determine if you’re running a hobby or a business:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Does the taxpayer depend on income from the activity?
- If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
- Has the taxpayer changed methods of operation to improve profitability?
- Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
- Has the taxpayer made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
You can still deduct expenses for a hobby but only up to the amount of income that you made. Meaning if you made $150 from streaming but spent $300 on the stream you could only deduct the $150. Hobby losses are just losses you have to eat.
Conclusion
Hobbies are great. They keep us entertained, sharpen our skills, and help us find like-minded communities. However, hobbies aren’t businesses in either the practical sense or the (perhaps more important) IRS sense. As a streamer you need to decide whether you’re pursuing a hobby or a business. Then, take the appropriate steps for the form you choose. If you have any questions on this or want to get in touch, leave a comment below!
