Threshold for reporting app earnings ?

[ahmadka2]

Last year I published a paid app, from which the gross sales were less than $200 in all of 2023, of which I received less than $150 after Apple's cut. For such a small amount, I think Apple doesn't even send out a 1099.

Do I need to report this amount in my 2023 tax filing ? If so, how ?

[PatriciaV]

Yes, the IRS expects you to report ALL income from all sources. Since this was an attempt to earn money, you are considered to be self-employed and will need to include Schedule C on your return.

Fortunately, you can also claim any expenses you incurred in producing and selling your product.

Additional Information:

• Where do I enter Schedule C?
• What self-employed expenses can I deduct?
• Where do I enter the home office deduction for my business?
• Am I considered self-employed?
• If I didn't get a 1099, do I still need to report the income? Even if it's less than $600?

[ahmadka2]

Thanks for the reply, but I had some follow-up questions:

1) I have a full-time job which comes with a conventional W-2 every year, which I will report on my tax return. However the small amount of money (less than $150) I made from app sales that I'm discussing here is definitely not what I would consider as my primary source of income. Rather, I would treat it as money made from a hobby. So given this info, would I still need to declare it on my tax return ?

2) Also, I read online that online self-employment related sales have to be reported under 1099-K. Even though I haven't received a 1099-K from Apple (I assume because I'm way below the threshold beyond which they're required to send out a 1099-K), don't I need to report this income under 1099-K instead of Schedule C ?

3) Lastly, as I mentioned above, the sales generates less than $200, but the money I actually received in the bank after Apple took their cut is less than $150. So which amount here do I need to declare ?

[JamesG1]

(1) If the activity is considered hobby income, the gross proceeds of $200 is taxable and reportable but no self-employment tax is due.  In addition, no expenses are allowed to be reported against the hobby income.  See here.

In TurboTax Online, post hobby income as follows:

• Down the left side of the screen, click Federal.
• Down the left side of the screen, click Wages & Income.
• Scroll down to Less Common Income and click on the dropdown menu.
• To the right of Miscellaneous Income, 1099-A, 1099-C, click the Start / Revisit button.
• To the right of Other reportable income, click the Start / Revisit button.
• At the screen Any Other Taxable Income, click Yes.
• At the screen Other Taxable Income, enter a description and the amount.
• Click Continue. 

The entry will be reported:

• on line 8z of Schedule 1 of the Federal 1040 tax return, and 
• on line 8 of the Federal 1040 tax return.

(2) IRS form 1099-K is a reporting form and the information is transferred to forms within the Federal income tax return.  Think of a W-2 which reports income but the income information is transferred to other forms within the tax return.  The $200 gross proceeds is below the 2023 IRS form 1099-K reporting requirements but the income is taxable and reportable.

If you are a U.S. citizen or resident alien, the IRS states that you are subject to tax on worldwide income from all sources and must report all taxable income and pay taxes.

(3) If you report self-employment income, you report $200 gross income and $50 expenses equals $150 taxable income and income subject to self-employment tax.

If you report hobby income, you report $200 taxable income.

[ahmadka2]

Hi James,

Thanks for your response but after going through your answers, I've become more confused. Let me go question by question:

1) In my first question, I asked if I even need to report the income in the first place, since it was earned as a hobby and not with the intention that it's income that I depend on. Secondly, it's also not much. So given these two points, I was wondering if it even needs to be reported in my tax return. In your response, I don't think you've actually answered this, but rather mentioned the consequences of reporting hobby income instead of self-employed income, and how to file hobby income. I didn't ask about either of these.

2) For second question, I asked if I should file the income under Section C, or 1099-K. The first TurboTax answer in this thread suggested Section C, but based on some Google searches, I felt it might need to be reported as a 1099-K. But again I felt you didn't answer this, and instead mentioned other info regarding 1099-K.

3) For the third question, I think you answered, but it raised the following questions in my head: What is 'self-employment tax', which you mentioned in your answers to question 1 and 3 ? And why is hobby income requiring me to be taxed on income I didn't even receive ? That is, Apple took their 30% cut and then sent me the remaining proceeds, but your response suggested that I'm taxed on the proceeds prior to Apple taking their cut ?

[KrisD15]

1. Yes, all income is to be reported, whether you get a tax form or not and no matter the amount. 

Hobby income and Self-Employed income are both taxable income and need to be reported. 

2. There is NOT a choice of Schedule C versus 1099-K. 

In your situation, there is only a choice of Self-Employment or Hobby

Form 1099-K is a form that a "Third Party Payer" such as Apple or E-Bay sends out, one copy to the Taxpayer and one copy to the IRS. This is information about money that passed through the payer to the Taxpayer. What the Taxpayer does about reporting this amount is up to the Taxpayer. It could report money that passed through for selling things on E-Bay and might be reported on Schedule D as a capital gain. For your situation, it was for an app you published, so it's Self-Employment (Schedule C) or Hobby income (Other Income).

3. If you do something for "fun" and it results in receiving income, you can report that income as "Hobby Income". 

Since a hobby is for fun, the IRS does not allow you to take expenses against that income. Therefore, if people paid $200 for your app, the $50 Apple fee cannot be claimed. 

Yes, you would be taxed on money that never made it to your pocket. 

 If you have a business that is fun and it results in receiving income, you can report that income as "Self-Employment". 

Self-Employment income is reported on Schedule C. If you get tax forms, like 1099-NEC or 1099-K, you would list those on your schedule C (along with any other business income including cash) and also claim expenses which are ordinary and necessary for the business. 

Self-Employed taxpayers are responsible for paying their own FICA (Social Security) Tax, that is referred to as "Self-Employment" Tax. 

If the "Business" shows a loss year after year, or the IRS does not see this as an attempt to earn a profit, the IRS could require you to report it as Hobby Income. 

There was a time when miscellaneous expenses (including hobby expense) could be reported (within limits) on Schedule A, but that is not available for Tax Year 2023. 

[ahmadka2]

Thanks Kris for the answers. I'm getting some clarity now.

Seems like there's a choice whether I should declare it as hobby income or self-employment income. In my mind, I think hobby is a better classification because that's what I consider it as, a hobby. I don't consider this to be a 'business' where I'm 'self-employed'.

Also I checked Apple's payment documents, and it only lists the proceeds I received as exact amounts, which is $127.30 for the entire 2023 year. This is the exact amount that I actually made, and received in my bank account. Apple's documents don't tell me the exact amount the user's paid for my app. Rathe, only an approximate amount is mentioned, which is $182. The actual number may be slightly higher or lower than that, which they don't show me.

I have a few more questions:

1) I'm still trying to understand why the IRS wants me to pay taxes on income I never received. I have tried looking at IRS documentation, but I don't see anything which suggests that my income is based on what customer's paid, rather than what I received. Can you please refer me to any IRS documentation which clarifies this ? I understand that with hobby income, I cannot take deductions, which is understandable. For example, I have to pay a flat rate annual fee to Apple after which my app is available for sale on their platform. It makes sense to not deduct this expense, since it's my choice to pay this as part of my hobby. But why should I pay taxes on income I didn't even receive ? I don't get this.

2) After looking at Apple's payment documentation, I see that there's about a 2 month delay in me receiving payments for my proceeds. For example, for sales that happened in June 2023, I received my proceeds sometime in August 2023. Because of this, for all sales of my app that happened in 2023, I received the proceed payments between March 2023 and February 2024. So when I have to determine my income for 2023, do I consider the sale date as being when I got income, or when I actually received it in my bank account ?

[KrisD15]

It would be as if my employer paid me direct deposit $1,000, but the bank charged my a $10 service fee. 

I have to claim, and pay taxes on, 1,000 even though I only got 990.

If you are a business, you could deduct the Apple Fees, but for a hobby, the IRS figures you pay the Apple Fees to do something you like to do, so the cost is on you. 

(There was a time when you could deduct miscellaneous expenses on Schedule A and this could be included, but the "Tax Cuts and Jobs Act" suspended that.)

According to the IRS 

"You may get a Form 1099-K if you received payments through payment cards, payment apps or online marketplaces.

These transactions can include payments you received as a gig worker, freelancer or other independent contractor (self-employed). This may also include payments you received from selling items as a hobby.

Report Form 1099-K payments and other income on your tax return

You must report all income you receive on your tax return. This may include the gross payment amount on Form 1099-K ..."

You are a CASH Taxpayer, so you claim the income for the tax year when you receive it. 

If someone pays in December 2023, but you don't get it reported to you until January 2024, you claim it for Tax Year 2024. 

[ahmadka2]

Okay, thanks for your response Kris. I have another concern I want to ask.

Can you also please guide me which option is better and safer to use, hobby vs self-employment ? Overall, I want to prioritize the correctness of my tax return, and I'm not that much concerned about which option (hobby vs self-employment) results in lesser tax. It's not that much money anyway, and I just don't want to get audited 😄

Even though I think of this as more of a hobby in my head, I thought of two reasons why declaring it as self-employment income might be better ?:

1) Although 2023 was the first year of me selling this app on Apple's App Store, I plan to keep selling this app for the foreseeable future. I read somewhere that if I report an income as a 'hobby' for multiple years, it might look suspicious to IRS ? If this is true, is it safer to declare it as 'self-employment' income ?

2)  I've also mentioned earlier that Apple doesn't tell me the exact gross sales amount that customers were charged for my app is 2023. The $182 I'm told is an approximate number, which I don't feel comfortable mentioning since the actual gross sales amount might be slightly higher or lower. But based on what you said, if I declare the income as self-employment, then I don't have to mention the $182 anywhere right, and I can just mention the exact proceeds amount that I actually received, namely $127.30 ? If yes, then perhaps this is another reason to declare as self-employment instead of hobby ?

Please share your thoughts.

[Vanessa A]

The fact that you plan to continue to sell the app and earn money doing so, would likely put you into the self-employment category more than the hobby as this is done with an intent to earn money, not just as something you do for pleasure and happen to make money doing or are just making enough to support your hobby.  

Whatever number Apple is giving you is the number you will use as a starting point.  So, if they are telling you the sales were $182 (it seems there should be some place to find a solid number) then you would report the $182 as your income.  Then the $55 would be deductible as a business expense if you are going to file as self-employed.  If you are choosing to list it as a hobby, then you would still report the $182 and then you could claim it as an itemized expense if you are itemizing your return instead of taking the standard deduction. 

Standard versus Itemized Deduction

Hobby versus Business Income