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My wife was a software developer for 15 years until we had our daughter, and since then she has been primarily concerned with caring for her. She has been volunteering her time for personal fulfillment, but recently a neighbor approached her about teaching piano lessons.

One option is to just give the lessons for free and ask them to purchase their own books. Another option is to charge for the lessons, but the income will amount to less than $5,000/year if she charges market rates.

I was looking at the Social Security calculations and it doesn't look like that additional income will make a significant difference in her benefits since the $0 years aren't that much different when averaging in such small amounts.

How much should a hobby business make to make it worth the effort of charging for such services?

Edit: We are MFJ and we max out the 15% bracket each year. I would change the balance of my Roth/Traditional contributions for this extra income, so any extra income effectively goes into retirement pre-tax, but reduces post-tax Roth contributions accordingly. Self-employment taxes will apply before that calculation.

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    I must be missing something. Typically when you take a paying job or charge for a service it isn't because of trying to increase your SS benefits. It's so you make money today. Does the $5000 have any value to you today? – TTT Feb 16 '17 at 16:24
  • Sure, $200-$400 each month is something, but it does nothing to change our lifestyle at all. Tracking the money coming in and going out, and the extra complexity of self-employment taxes may not be worth it. – NL - Apologize to Monica Feb 16 '17 at 16:35
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    You don't have to track the money going out if you don't want to. They way I see it, your wife would do it anyway for free. So the only thing that would change is depositing some checks and keeping a tally for the year. From a financial point of view there is no reason to turn down checks people are willing to hand you. There may be other reasons to prefer doing it for free, but taxes, SS, and the effort of depositing checks shouldn't normally be among those reasons. You could donate all of her income to charity if you prefer... – TTT Feb 16 '17 at 16:41
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    I'm not going to recommend participating in the informal economy, but it's probably what I'd do. There may even be either a legal or enforcement de-facto threshold for the amount of unreported employment you're allowed to earn. For instance, I don't think the police are cracking down on lemonade stands at the moment. – Nathan Cooper Feb 17 '17 at 11:08
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So long as you don't hate what you are doing, I'd say the price is somewhere in the neighborhood of $100-200 year of income to be worth the bookkeeping. I'd only say more than that if you have a ridiculously complex tax situation, you have an irrational hatred of filling out a few forms once a year, or if you just have such a stupidly large amount of money that even having a few hundred dollars a year to donate to people in desperate need just doesn't mean anything to you. Or if you are under special income limits and just a few dollars of income would put you in a bad situation (like a loss of medical benefits, etc).

The reason is actually quite simple: the taxes aren't really that hard or time consuming. I've handled three self-employment businesses in my life, and unless you are trying to itemize every last dollar of business deductions and expenses, or you really want to scrape out every last cent from minor deductions that require considerable extra paperwork, it's a few extra forms on your taxes. Most of the extra taxes are as a percentage, so it reduces the benefits, but really not by much.

You don't have to make it extra complicated if the extra complexity doesn't give you a big payoff in benefit.

I would suggest you pick the simplest imaginable possible system for accounting for this, so that you might only spend an extra few hours per year on the books and taxes. Don't keep $10 sheet music receipts if you feel it's a burden to try to itemize expenses, etc. Instead, the decision should be if you (or in this case your wife) would enjoy doing it, and bringing in money can just be nice in it's own way. I'd suggest she keep some out for little extra niceties, earmark some for feel-good charitable giving, and then of course sock away the rest.

Don't let extra income be an unnecessary burden that prevents you from getting it in the first place.

  • The tax forms are not time consuming, but the other record keeping, depositing checks, tracking expenses for books, etc., do add up. Not just the occasional sheet music that I would ignore, but the regular practice and theory books as the children advance. – NL - Apologize to Monica Feb 16 '17 at 20:00
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    Yes, but, you don't have to track any of that if you don't want to. You are required to track and report the income. You are not required to track and deduct the expenses if you don't want to. – stannius Feb 16 '17 at 20:44
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    hatred of filling forms is never irrational. – njzk2 Feb 16 '17 at 21:06
  • @NathanL That's the "So long as you don't hate what you are doing" part of his answer. If she doesn't want to practice herself in order to be able to do that job, then don't do it. But then the reason is that she doesn't like doing it, not that it's not worth the money. – Necoras Feb 16 '17 at 23:10
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    I'll add to this if I can figure out a schedule C, anyone can. – Marshall Tigerus Feb 17 '17 at 17:32
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I had a chat with a coworker whose spouse also teaches music lessons. One interesting insight was that after raising prices, the children were much more likely to come prepared because the parents felt more invested when it cost them more. They were also less likely to cancel the lessons at the last minute. This is an argument in favor of TTT's suggestion to charge something even if we donate the income to charity. Along those lines it might also make sense to give discounts if the child comes prepared having practiced daily.

I agree that it's not a lot of paperwork for some additional pay, the problem is that I would also be tempted to buy a new piano and find other expenses to reduce the income. That's a discussion for another day.

I think the break-even point is probably somewhere around $1000/year when I weigh record-keeping time verses the income. So as long as we exceed that, I will probably encourage her to charge for the lessons even if she charges below the market for them. I will consider setting up a charitable giving account that they can pay to instead of paying us directly.

  • As a related side note, I read about a study last year, where Day-Care centres which previously had no financial penalties on late pickups instituted such penalties [ie: pay an extra $5 for every 5 minutes late you are picking up your kids]. On average, the centres which made the change experienced an increase in late-pickups. The hypothesis of the researchers was that putting a financial cost on the action of a late pickup, reduced the social guilt that the parents felt from being rude to the daycare owners in being late. Paying the penalty may make the action 'socially acceptable'. – Grade 'Eh' Bacon Feb 16 '17 at 21:39
  • Of course, that's only a tangent - in this case the principles are not the same. It does highlight, however, that money does change the nature of a transaction, on a social / psychological level, beyond the flat $ changing hands. – Grade 'Eh' Bacon Feb 16 '17 at 21:40
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    This is also a good argument for not paying all of your children's college expenses. If they are invested in it, they may study harder. – TTT Feb 17 '17 at 15:11
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The cost of paying tax should be considered an additional financial expense, and the administrative burden of filing those taxes should be considered an additional labour 'expense'. Simplified, your question is asking how to determine whether these additional expenses are 'worth' it. There are many ways to calculate what your time is 'worth'. Consider two situations where you may consider picking up additional part time work at minimum wage:

1) If you are working 80 hours a week at a stressful but high-paying job, working another 5 hours a week at minimum wage would likely not be worth your time [both because you already make 'a lot' of money, and also because your time is limited and therefore precious].

2) If you are working 20 hours a week at minimum wage, then another 5 hours a week at the same job would likely be worth your time [both because it would increase your income by 25%, and also because it would not put a heavy strain on your light schedule].

These two extreme examples highlight the inferred principle that I think generally applies to weigh such decisions:

  • If you need money to sustain your lifestyle (either now or into retirement), then earning more money has a positive impact on you;

Competes with:

  • If working additional hours would be a detriment to your lifestyle, then earning more money has a negative impact on you

In your specific example, the actual 'work' component will happen regardless of the money aspect. That is, your wife will be providing these services regardless. So your question is essentially "would it be worth it for my wife to make $5k, given that she would pay tax on that money and would bear the burden of administrating the tax filings etc.?"

We can't answer this directly, because it relates to what your wife values. If doing this would make the activity (which is otherwise just a hobby) an unwanted chore, then it may not be worth the post-tax income. If doing this would not impact her enjoyment of the teaching, but would add on an unwanted ~1 hour / week of paperwork, is it worth spending 50 hours over the course of the year, to earn $5k? I assume the answer then would be "yes".

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Normally when thinking about whether it's worth it to start a small business, the biggest factor is your time. There's a big difference between spending 10 hours to make a profit of $50 vs spending 1 hour to make a profit of $50. Your scenario is quite different though, in that you suggest your wife is considering teaching for free instead of accepting payment. In this case the time factor almost goes away, since if you accept payment there is very little extra time involved for depositing checks, tracking income, and filling out some extra forms come tax time. From a financial point of view there is no reason to turn down the money if people are willing to pay it. There may be other reasons to prefer doing it for free, but taxes, Social Security payments, and the small extra effort to run the business wouldn't normally be among those reasons.

I don't know what your reasons for possibly preferring to do it for free are, but an alternative option to consider is to donate all of her income to charity.

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Thinking about the business overall, your "profit" would be:

Income - Expenses - Taxes

Since this is a sole proprietorship, the taxes are going to depend on your marginal tax rate. If you file jointly, your income will determine what your marginal tax rate is. If you file separately, there likely wouldn't be any tax on that income since it's less than the standard deduction, but you lose benefits of filing jointly (combined exemptions, etc.)

So think about how much she would charge, what expenses are involved (before taxes), what the taxes would be on that profit, and what the "opportunity costs" are - is it worth time away from the kids/hobbies/etc. for that hobby?

How much should a hobby business make to make it worth the effort of charging for such services?

That would fall in the "expense" section. Are you talking about the actual costs (tax prep, etc.) or just the hassle of collecting, accounting, etc. Certainly those are a consideration but it's harder to quantify that. If you can come up with some sort of cost then certainly it would fit in the overall value equation.

I'm not sure using additional Social Security benefits as a gauge is helpful, since you wouldn't see those benefits until you're of retirement age (according to SS) and a lot can happen between now and then.

  • I thought the question is asking about comparing doing it for free vs charging for it. – TTT Feb 16 '17 at 16:26
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It's nice that she's willing and able to give free lessons.

I caution that her students (or their parents) won't really value the lessons unless they are paying for them. Charge enough to make the lessons worthwhile to the student/family, even if you are giving a friendly discount to market rates. $50 per 45-minute lesson is market (at least where I live). $40 would be a good deal. $25-30 is quite a deal. Books are extra, of course. (2017 rates)

  • An interesting point. – Kevin Feb 17 '17 at 0:09
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Another factor you may want to consider is insurance, if your wife is at their house as a friend who happens to be teaching the kid to play and the kid falls off their chair and hurts them self that is rather different to your wife being brought in to the house as a contractor and an injury occurring during an activity that she was supervising.

I am in a similar situation and I have a $5 million public liability policy, which costs about $300 per year. So if her income is likely to be less than that she may be better off "helping a friend learn" rather than "providing tutoring services".

There may also be legal requirements, I am required to apply for government checks every few years in order to operate a business that involves working with children.

  • The lessons will be occurring in our home, which means we're liable for accidents regardless, but whether we need additional coverage or a rider on our home owners insurance is another item to investigate. – NL - Apologize to Monica Feb 17 '17 at 15:29
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As a self-employed Handyman I can tell you this. Any work that is done, be it professional, part-time, hobby or whatever else, has to answer to two primary criteria. As you asked, it has to be worthwhile in financial terms and more importantly in personal terms. In the long term, charging low rates will demoralize her. Not worth it.

Someone once said; "I have no quarrel with he who charges cheaply, because who better then he knows the value of his services"? Obviously one has to remain reasonable. Then there is an ambush factor in working for yourself. I call it syphoning losses since they are extremely difficult to calculate as noted above here already. In the first place they are extremely difficult to detect anyway. Micro-management will not tell you the losses, you can only do it at the end of a period on a balance sheet. Then you have to calculate a fair price in terms of lessons given and monies received.

The trick is to gain a fair assessment of worth to her without her needing to go into the books, just as a simple gut feel. She needs to really feel good about it to maintain motivation for the future. Otherwise, I did it, it does not work.

The other consideration is that when money changes hands it places a benchmark on the tuition and the relationship. One. It locks her into delivering professional work as she already is one. Two. The students will be locked into giving fair and excellent commitment in being taught.

A simple calculation goes like this; Use the time span of a month as it is easier to break down available time per week. Also remember that there will perforce be extra hours spent in consultation with parents, this is a syphoning cost, it has be calculated. Difficult at the start, but keep track of it. One other thing. I do not give discounts of extend favours, but I keep my prices reasonable. [[I was told I am some 25% more expensive than the latest quotes, but I kept on getting work with a high execution to quotation rate.]] Floating prices are impossible to track, manage and justify, people talk to each other, whether you like it or not. Do proper, reasonable calculations and be up front to all about how you work. In contract on paper. It just may be necessary to scale prices from beginner to advanced classes.

OK, $50 seems a fair price, I don't live in the States, but about three/four Big Mac's would compare about right. You are NOT selling time, you ARE selling expertise.

Decide how much she wants out of it per month. Forget retirement, you live now. This income will also cover other "invisible" extraneous work. Determine how much time will be spent in giving lessons. You can only charge for "visible" work done.

Basic Hourly Rate = Monthly Income / Lesson Hours.

Then there's a catch. Research has shown that owners of one man and small businesses spend about 55% of their time in getting new business. So,now.

Charged Hourly Rate = Basic Hourly Rate DIVIDED by 45%.

This could frighten you, but these are hard commercial facts. Things could appear to be extremely expensive. You will; however; have a solid base from which to decide as you go further. The accounting is a good place to start, but she, you both rather, have to feel good about the rewards and the counter performances.

Great success to you both!

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    In this case, my wife specifically does not want to attract more business. I guess that's another point in favor of charging a high price. – NL - Apologize to Monica Feb 17 '17 at 14:47

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