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IRS Tax Tips June 5, 2024
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Issue Number: Tax Tip 2024-55
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*Hobby or business: What people need to know if they have a side hustle*
Hobbies and businesses are treated differently when it comes to filing taxes. 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 are paid through payment apps for goods and services during the year, they may receive an IRS Form 1099-K for those transactions. These payments are taxable income and must be reported on federal 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 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:
* 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, and 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 they carry out the activity in a businesslike manner and keep complete and accurate books and records?
* 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 recordkeeping [ [link removed] ] throughout the year will help when they file taxes.
*More information*:
* What to do with Form 1099-K [ [link removed] ]
* Small Business and Self-Employed Tax Center [ [link removed] ]
* Publication 535, Business Expenses [ [link removed] ]
* Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C) [ [link removed] ]
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