Your side hustle brings in a bit of money, but you still consider it a hobby. Which is it — business or recreation? It is important to make the right choice when you file your taxes. Below are some of the factors to consider, all of which should be weighted equally, in trying to decide how to treat your endeavor.
- Does the time and effort you put into the activity show you intend to make a profit?
- Does the activity clear a profit in some years, and if so, how much profit?
- Can you expect to make a future profit from the appreciation (growth in value) of the assets used in the activity?
- Do you depend on income from the activity for your livelihood?
- Are any losses due to circumstances beyond your control or are losses normal for the startup phase of a business of this type?
- Have you changed your method of operation to improve profitability?
- Do you carry out the activity in a businesslike manner and keep complete and accurate books and records?
- Do you have the knowledge to run a small business?
Inside the mind of the IRS
People are increasingly earning significant income from side hustles, blurring the line between hobby and small business. But to the IRS, these are distinct activities. Overall, the tax agency considers a hobby an activity you pursue for enjoyment without any intention of making a profit. A business is operated to make a profit.
However, whether you are pursuing a hobby or running a business, if you are paid through a payment app for goods and services, you may receive an IRS Form 1099-K for those transactions, which are treated as taxable income and must be reported on federal income tax returns.
One way to reduce any taxes that are due is through deductions. You cannot deduct hobby-related expenses, but you can deduct business-related expenses. So, if you are earning enough on your hobby income that you’re paying taxes, it may be worthwhile to transition to a small-business model so that you can deduct any expenses.
