a question you'll have to decide - is this a business or hobby?
The IRS created a nine-point hobby vs. business test to determine whether your activity is a hobby or business:
- Do you treat the activity like a business by maintaining accounting records?
- Do you put in the time and effort appropriate to turn a profit?
- Do you depend on the activity’s income for your livelihood?
- Are the losses sustained in the activity beyond your control? Did the losses happen during the activity’s startup phase?
- Have you changed your operations to try to achieve or improve profitability?
- Do you or your advisors have the knowledge to run a successful business?
- Have you profited from running similar businesses in the past?
- Has the activity ever made a profit and, if so, how much?
- Can you reasonably expect the activity to earn a profit from the appreciation of assets used in the activity?
The questions root out whether you’re running the activity like a business or as a serendipitous way to earn extra income. If you’re answering “yes” to all of these questions, the activity is more than likely a business. If you’re scoring any lower, you should get in touch with a tax accountant for help.
Businesses and hobbies receive different tax treatment, so it’s important how you approach a money-earning activity.
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as a hobby the income is taxable - but not subject to self-employment tax (report on schedule1) but none of your related expenses are deductible
as a business the income is taxable but you get to deduct business-related expenses so you only pay taxes on the net. if the net exceeds $400 you'll also owe self-employment tax. the reporting is done on Schedule C
