A side hustle can be a business. You may not see your side hustle as a business, but according to the IRS your side hustle becomes a business once you’re consistently earning income with the intent to make a profit. The IRS doesn’t care if you call it a hustle, a gig or a hobby—they care if you’re making money and reporting it properly. If your side hustle just supplements your main income, it is not a business, but you may owe income taxes.
The Freelance, Gig-based Side Hustle
Side hustles typically are freelance, gig-based, flexible, easily started and stopped. You directly trade your time for money (e.g. driving for a rideshare, pet sitting gigs supplied by Rover) to supplement your main income. Your side hustle is not based on making a profit, it’s basically a temporary “job”. You do need to state this income on your Form 1040. If you worked for an agency or business, you and IRS will most likely receive some type of 1099 form stating your income.
A Hobby as a Side Hustle
If a hobby is your side hustle, are you doing it for recreation or profit? The IRS has a clear stance on what is considered a hobby versus a business. A hobby is something you do for recreation, not for profit, even if you occasionally make money doing it.
So, if you make ornaments and seasonal decorations and sell them at craft fairs, it’s most likely a hobby. You may want to check with your accountant, but you probably need to report this income on Schedule 1 of Form 1040. You can face penalties for income, even hobby income, not reported on your tax return. However, you can’t deduct losses from a hobby like you can for a business. ” hobby loss rule.”
Now if you’re filling Etsy orders weekly and taking custom requests, the IRS may decide you’re running a business, which requires paying self-employment tax and filing Schedule C. There isn’t a strict dollar amount that defines a business, but it’s worth knowing that if you accept more than $600 for goods and services using online marketplaces or payment apps, you could receive a Form 1099-K to report payments.
IRS
Whether it’s payment from your hobby or a side hustle / gig, it is very likely that your income will be listed on one of the 1099 forms was sent by payment processors (like PayPal and Venmo) online marketplaces (such as eBay, Etzy), and companies paying you as a contractor send a 1099 to the IRS as well as to you.
Payment processors (like PayPal, Venmo for business), online marketplaces (like Etsy, eBay), and companies paying you as a contractor send copies of forms like 1099-K, 1099-NEC, or 1099-MISC to you and the IRS.
The IRS’s Automated Underreporter (AUR) system compares the income reported by these third parties with the income you report on your tax return (Schedule C, for instance).
Banks and payment apps provide data to the IRS, showing significant deposits or transactions. Large amounts of money flowing through payment apps without corresponding income on tax returns raise Red Flags.
Side Hustle or Business?
Side hustles are not structured as small businesses, but the IRS considers anything making a profit a business. Their concern is how it operates and whether you’re reporting income correctly. Again, it may be a good idea to talk to your accountant to ensure you’re meeting your tax obligations for any side hustle income. You do not want to incur IRS penalties.
The informal side hustle in which you trade time for money and supplement your main income, may be exactly what you want or need for a period of time. Even though you may not want to legally transition to formal business structure, if you depend on your side hustle to make ends meet, there’s value in treating it like a small business. Successful side hustles require boundaries. Treating your hustle like a business with goals, marketing, and accurate records can help legitimize your work and be an asset if you make the decision to transition your hustle to a small business.
A side hustle is a low-risk way to earn extra money, learn new skills, test ideas. If its purpose becomes providing goods or services to generate profit for the owner(s) it has evolved into a small business, requiring more formal structures and tax compliance.
For a professional side hustle, you may need to begin planning the transition to small business right from the beginning. Potential clients expect even part-time accountants, consultants, coaches and other professionals to have a business.
How to start a successful small business will take at least one more blog entry. But if you are trying to decide if you have a hobby, hustle, or business, these questions based on an IRS document https://www.irs.gov/newsroom/heres-how-to-tell-the-difference-between-a-hobby-and-a-business-for-tax-purposes can help.
- Does the taxpayer carry out activities in a businesslike manner and maintain complete and accurate books and records.
- Does the taxpayer put time and effort into the activity show they intend to make it profitable.
- Does the taxpayer depend on income from the activity for their livelihood.
- Does the taxpayer have personal motives for carrying out the activity such as general enjoyment or relaxation.
- Does the taxpayer have enough income from other sources to fund the activity
- Are losses due to circumstances beyond the taxpayer’s control or are they normal for the startup phase of their type of business.
- Does the taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.
- Can the taxpayer expect to make a future profit from the appreciation of the assets used in the activity.
I hope you did not find this post too boring. Personally, I don’t think too many things bore me as much as reading financial documents. However, no matter how you make money, side hustle or business, you need to be familiar with the records you are required to keep for the IRS.
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