Hobby or Business?

Here’s what you need to know if you have a side hustle:

  • Businesses operate to make a profit and hobbies are for recreation.
  • For both businesses and hobbies, if you are paid through a payment app you may receive an IRS Form 1099-K, these payments are taxable income and must be reported.
  • Hobby expenses are miscellaneous itemized deductions and are not deductible.
  • If your net earnings from self-employment are $400 or greater you must file an income tax return.

How to decide if you have a hobby or business:

  • Does the time and effort put into an activity show you intend to make a profit?
  • Do you ever make a profit, if so, how much?
  • Do you expect to make future profits from the appreciation of assets used in the activity?
  • Do you depend on the income for your livelihood?
  • Are losses normal for the startup phase of your type of business or are they due to circumstances beyond your control?
  • Have you changed methods of operation to improve profits?
  • Is the activity carried out in a businesslike manner and are accurate and complete books and records kept?
  • Do you and your advisors have the knowledge needed to carry out a successful business?

Note: This information cannot take the place of advice from a lawyer. Each case is different and needs individual legal advice. You should contact the LITC or a private attorney if you need representation on a tax matter or if you have questions.

Sources:

https://www.irs.gov/newsroom/tips-for-taxpayers-who-make-money-from-a-hobby
https://www.irs.gov/newsroom/hobby-or-business-what-people-need-to-know-if-they-have-a-side-hustle
https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center