Here’s what HIVE AI had to say about “How do I report income from a side hustle or hobby?”:
Reporting Income from a Side Hustle or Hobby
When it comes to reporting income from a side hustle or hobby, the tax treatment depends on whether your activity qualifies as a business or a hobby. Let me explain the key differences and reporting requirements for each.
Business vs. Hobby: Understanding the Distinction
The primary distinction between a business and a hobby is your intent and how you conduct the activity:
If you weren’t an employee of the payer, where you report the income depends on whether your activity is a trade or business. You’re in a self-employed trade or business if your primary purpose is to make a profit and your activity is regular and continuous. IRS.gov FAQ
Taxpayers who have significant income from other sources may try to reduce their taxable income by reporting losses from activities that may or may not be engaged in for profit. IRS IRM 4.1.5 Case Building, Classification, Storage and Delivery
The IRS looks at several factors to determine if your activity is a business or hobby, including:
Does the taxpayer have losses in three out of the last five years, or two out of the last seven years for breeding, training, showing, or racing horses? If so, it may indicate a hobby. IRS IRM 4.1.5 Case Building, Classification, Storage and Delivery
There are certain types of activities that lend themselves to hobbies/activities not engaged in for profit:
- Rental properties have many rules and material participation is one that is hard to overcome if the TP is just an investor and not a real-estate professional.
- Collecting antiques, collecting cars, etc.
- Part-time activities for entertainment or to pass time such as racing, farming, etc.
- Personal products for personal use IRS IRM 4.1.5 Case Building, Classification, Storage and Delivery
Reporting Side Hustle Income (Business)
If your side hustle qualifies as a business (profit motive with regular and continuous activity), you should report it as follows:
If you’re in a self-employed trade or business, you must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship). IRS.gov FAQ
A taxpayer’s net earnings from self-employment include the gross income derived from any trade or business carried on by the taxpayer. The term “derived from” “necessitates a nexus between the income and the trade or business actually carried on by the taxpayer.” Dawson U.S. Tax Court Opinions: Rollin J. Morehouse & Maureen B. Morehouse Dawson U.S. Tax Court Opinions: Rollin J. Morehouse & Maureen B. Morehouse
Self-Employment Tax Considerations
If you’re self-employed, you’ll also need to complete Schedule SE (Form 1040), Self-Employment Tax and pay self-employment tax on your net earnings from self-employment of $400 or more. There’s no withholding of tax from self-employment income. As a self-employed individual, you may need to make estimated tax payments during the year to cover your tax liabilities. Refer to Form 1040-ES, Estimated Tax for Individuals for more details on who must pay estimated tax. IRS.gov FAQ
Married Couples with Joint Business Activities
An unincorporated business jointly owned by a married couple is generally classified as a partnership for federal tax purposes. IRS Determination-1402004
However, for tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture”, whose only members are a husband and a wife filing a joint return, can elect NOT to be treated as a partnership for Federal tax purposes. Both spouses can still get social security credit if they elect for the business to be treated as a qualified joint venture. Spouses make the election on a jointly filed Form 1040 by dividing all items of income, gain, loss, deduction, and credit between them in accordance with each spouse’s respective interest in the joint venture, and each spouse filing with the Form 1040 a separate Schedule C. IRS Determination-1402004
Reporting Hobby Income
If your activity is classified as a hobby rather than a business, the reporting requirements are different:
If you’re not an employee of the payer, and you’re not in a self-employed trade or business, you should report the income on line 8j of Schedule 1 (Form 1040), Additional Income and Adjustments to Income PDF and any allowable expenses on Schedule A (Form 1040), Itemized Deductions. Refer to “Activity not for profit” in Publication 525, Taxable and Nontaxable Income for allowable nonbusiness expenses. IRS.gov FAQ
For tax years 2018 or later, it should be reported on Form 1040 Schedule 1, line 8. This income should be categorized as “other income – unearned.” IRS – Publication 5558: Activities Not Engaged in for Profit Audit Technique Guide Internal Revenue Code Section 183
Limitations on Hobby Expense Deductions
If you rent personal property for profit, include your rental expenses in the total amount you enter on Schedule 1 (Form 1040), line 24b. If you don’t rent personal property for profit, your deductions are limited and you can’t report a loss to offset other income. See Activity not for profit under Other Income, later. IRS – Publication 525: Taxable and Nontaxable Income
The Category 2 and Category 3 expenses are limited by the gross income from the activity after subtracting Category 1 expenses. Important Note: The Tax Cuts and Jobs Act (TCJA) suspended miscellaneous itemized deductions, so these deductions are not available for tax years beginning after December 31, 2017 and before January 1, 2026. IRS – Publication 5558: Activities Not Engaged in for Profit Audit Technique Guide Internal Revenue Code Section 183
Reporting Requirements Regardless of Classification
Whether your activity is a business or hobby, all income must be reported:
It’s important to know that if you’re getting payments for doing a side hustle, running a small business, or selling things online, that money should be reported as income. And if you received over $20,000 and had over 200 transactions in 2023 and previous years through payment apps and online marketplaces, you and the IRS could receive a Form 1099-K. IRS – Publication 5731-B: Are you making money selling things or providing a service?
It’s the profit from these activities that’s taxable income. The Form 1099-K has the gross, or total, amount of payments you got. You can use it and other records to figure out the actual taxes you owe on any profits. Remember that all income, no matter the amount, is taxable unless the tax law says it isn’t – even if you don’t get a Form 1099-K. IRS – Publication 5731-B: Are you making money selling things or providing a service?
Gross income means all income you received in the form of money, goods, property, and services that isn’t exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Gross income includes gains, but not losses, reported on Form 8949 or Schedule D. Gross income from a business means, for example, the amount on Schedule C, line 7, or Schedule F, line 9. But, in figuring gross income, don’t reduce your income by any losses, including any loss on Schedule C, line 7, or Schedule F, line 9. Dawson U.S. Tax Court Opinions: Peter Rosselli & Bernadette V. Rosselli Dawson U.S. Tax Court Opinions: Peter Rosselli & Bernadette V. Rosselli
Bartering and Non-Cash Income
Gross income includes bartered services. Dawson U.S. Tax Court Opinions: Mohamad Nasser Aboui & Mahyar Mizani Dawson U.S. Tax Court Opinions: Mohamad Nasser Aboui & Mahyar Mizani This means if you exchange services or goods without cash changing hands, the fair market value of what you receive is still taxable income.
Record-Keeping Requirements
Regardless of whether your activity is a business or hobby, maintaining good records is essential:
Morris had to include in his gross income $113,322 for 2006 and $11,248 in 2007 from a project he worked on after a tree fell into somebody’s house and the insurance company’s service provider hired him to fix it. This was an extensive repair job for which Mr. Morris received a form 1099 which was not reflected in any normal way on his return. The answer is yes, he clearly has to include this in his income in the year that he received it, as he himself acknowledged. Mr. Morris did also have expenses in producing this income, of course, as contractors will. Dawson U.S. Tax Court Opinions: Richard W. Morris
This case illustrates the importance of reporting all income, even from one-time projects, and keeping records of related expenses.
Occasional Activities
Some activities are so infrequent that they may not qualify as a business:
Certain intermittent income producing activities occur so infrequently that neither their recurrence nor the manner of their conduct will cause them to be regarded as trade or business regularly carried on. For example, income producing or fund raising activities lasting only a short period of time will not ordinarily be treated as regularly carried on if they recur only occasionally or sporadically. Furthermore, such activities will not be regarded as regularly carried on merely because they are conducted on an annually recurrent basis. Accordingly, income derived from the conduct of an annual dance or similar fund raising event for charity would not be income from trade or business regularly carried on. Tresuary Reg. 1.513-1
Conclusion
To properly report income from a side hustle or hobby:
- Determine whether your activity qualifies as a business (profit motive with regular, continuous activity) or a hobby.
- For business income:
- Report on Schedule C
- Pay self-employment tax on net earnings of $400 or more using Schedule SE
- Consider making estimated tax payments throughout the year
- For hobby income:
- Report on Schedule 1, line 8
- Note that hobby expense deductions are limited and currently suspended under the Tax Cuts and Jobs Act through 2025
- Keep detailed records of all income and expenses, regardless of classification.
- Report all income, even if you don’t receive a Form 1099-K or other tax form.
Remember that proper reporting of all income, whether from a business or hobby, is legally required. If you’re uncertain about how to classify your activity or how to report the income, consulting with a tax professional is advisable.
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