Hobby or business: here’s what to know about that side hustle

Sometimes the line between having a hobby and running a business can be confusing, but knowing the difference is important because hobbies and businesses are treated differently when it’s time to file a tax return. The biggest difference between the two is that businesses operate to make a profit while hobbies are for pleasure or recreation.

Whether someone is having fun with a hobby or running a business, if they accept more than $600 for goods and services using online marketplaces or payment apps, they could receive a Form 1099-K. Profits from the sale of goods, including personal items, and services is taxable income that must be reported on tax returns.

There are a few other things people should consider when deciding whether their project is a hobby or business. No single thing is the deciding factor. Taxpayers should review all of the factors to make a good decision.

How taxpayers can decide if it’s a hobby or business
These questions can help taxpayers decide whether they have a hobby or business:

• Do they carry out the activity in a businesslike manner and keep complete and accurate books and records?
• Does the time and effort they put into the activity show they intend to make a profit?
• Does the activity make a profit in some years – if so, how much profit does it make?
• Can they expect to make a future profit from the appreciation of the assets used in the activity? 
• Do they depend on income from the activity for their livelihood? 
• Are any losses due to circumstances beyond their control or are the losses normal for the startup phase of their type of business? 
• Do they change their methods of operation to improve profitability? 
• Do the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business?​

Whether taxpayers have a hobby or run a business, good record keeping is always key when it’s time to file taxes.


More information:
Publication 535, Business Expenses
Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C)
Small Business and Self-Employed Tax Center at IRS.gov Understanding Your Form 1099-K


"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
 
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
 
We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. 

Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs.  
 
We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at info@monarchaccountinggroup.com. 
 
For more free resources, such as Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com.

Mia Verc, CPA;  Janice Papais, CPA