When it comes to filing taxes, hobbies and businesses are treated differently. The key distinction is that businesses aim to generate profit, while hobbies are pursued for enjoyment or recreation.
Regardless of whether you're having fun with a hobby or managing a business, if you receive payments through apps for goods or services, you'll likely get an IRS Form 1099-K for those transactions. These payments are considered taxable income and must be reported on your federal tax return.
To determine whether your side hustle qualifies as a hobby or a business, consider the following questions. No single factor is decisive; instead, review all aspects to make an informed judgment.
Questions to Help Determine if Your Activity is a Hobby or Business:
Profit Intent: Do you invest significant time and effort to make a profit?
Profit History: Does your activity generate a profit in some years, and if so, how substantial is it?
Future Profit: Is there potential for future profit through the appreciation of assets used in the activity?
Income Dependence: Do you rely on the income from this activity for your livelihood?
Loss Justification: Are any losses due to factors beyond your control, or are they typical for a new business?
Operational Adjustments: Do you adjust your methods to enhance profitability?
Businesslike Approach: Do you conduct the activity businesslike, maintaining accurate records?
Expertise: Do you and your advisors have the necessary knowledge to manage the activity successfully as a business?
Whether your endeavor is a hobby or a business, maintaining thorough records throughout the year will be beneficial when filing your taxes.