If you take home casino winnings or money from private card games, federal tax laws require you to report it as income. For most players, this is considered hobby income, which means that not all gaming expenses can be deducted. But, when you qualify as a professional gambler, you can deduct all of your gambling expenses and losses, just like other business professionals. Here’s what you need to know:

1 – Are my earnings business income?

One or two winning jackpots that you take home from the casino or from poker games with your friends do not make you a professional player. A professional player is operating a business, not just to win a game or two. In an audit, the professional gambler will be required to show that his gambling activities qualify as a business.

The IRS has classified gambling as a hobby because most people play for fun. This is the reason why gambling winnings are generally included along with other miscellaneous income. This is bad because while every penny of gaming revenue must be claimed, the hobbyist cannot deduct all of the expenses involved in producing that revenue. However, a professional gambler can take full advantage of business tax laws that allow self-employed individuals to deduct all qualifying losses and expenses.

Tracking wins, losses, and expenses is the same for both the amateur and professional gambler, and must be done according to IRS rules if you want to survive a tax audit. Otherwise, those expenses and losses could be disqualified. To escape hobby classification, a player must be prepared to demonstrate that he is making “real and honest” efforts to generate a profit. The desire to win big is not enough.

2 – Can I prove that gambling is my business?

Documenting your gambling professionally is a critical part of proving to the IRS that you are not a recreational gambler. Professional players must keep records of all gaming activities. This should include the date and location of each event, your opening bank, closing bank, and net profit or loss.

All expenses involved in getting to each betting event, along with hotel costs, entrance fees, meals, tips and private coaching must also be documented if you are to survive an audit. if the casino “compensations” your expenses are not deductible; only expenses paid by you personally are deductible.

3 – Do I have to pay self-employment tax on my earnings?

There is no self-employment tax on hobby gambling income; however, there is a self-employment tax on most business profits.

Self-employment taxes fund your personal Medicare and Social Security bills. When you are employed by someone else, your employer pays half of those taxes and you pay the other half. The freelancer pays for everything. However, many times most of this tax can be avoided by funding a private retirement account set up for your business.

In other words, whether or not you pay self-employment tax really depends on how much you know about current small business tax laws. Working with a qualified tax accountant, one recommended by other players, is the best way to reduce your self-employment tax.

If you think you qualify as a professional gambler, you should not prepare your own tax return. Because an audit is very possible in this industry, you’ll want the guidance of a qualified tax accountant when dealing with the IRS.