Business income vs Hobby income vs Misc/other income. Also Amazon Vine Program.

Hello Takineko,

To be considered a business you must be doing it with the intent to make a profit and file the income and expenses https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-businesson a schedule C and pay tax plus the 15.3% self employment tax on the profit.

If it is truly a hobby then the income gets reported as other income and no expenses can be taken, you pay regular tax on the income but no self employment tax.

Here is are a couple of links to articles on hobby versus business income

https://turbotax.intuit.com/tax-tips/small-business-taxes/when-the-irs-classifies-your-business-as-a-hobby/L5NClTTtK

https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business

Hi John,

That first link doesn't appear to work for me. Getting a 404 on the IRS site for that link.

Am I correct in understanding that you're saying that the "benefit" for claiming it as a hobby would be that I don't have to pay the 15.3%  self employment tax on the "profit". In my case, it would be me claiming the Amazon Vine thing as a hobby, and then I would pay the "income" as other income and pay regular tax on it but don't have to pay the additional 15.3% of that because it is not a business income?

My only concern now would be how I would prove to the IRS that it's a hobby? What documents would I need to prove it? From the link you showed are the questions I would need to consider if this was a hobby:

"Do you put in the necessary time and effort to turn a profit?"
What would that even mean? I'm getting items fore free which would be my profit I guess? But I don't know what the necessary time and effort for this would be. I'm writing the reviews for the item as I would normally write a review for Amazon on an item that I liked or disliked in particular.

"Have you made a profit in this activity in the past, or can you expect to make one in the future?"

This is my first time trying this out, and I'm still unclear about if getting an item is a profit since I'm not spending any money to get the item besides in taxes. 

"Do you have the necessary knowledge to succeed in this field?
I'm writing reviews on these items, so I guess I would have knowledge of the item and it's applications enough, but I don't know what it would mean to "succeed in this field" for this particular case.

"Do you depend on income from this activity?"

I do not.

"Are your losses beyond your control?"
I don't think there's any losses, let alone any beyond my control, again due to the income being "items" with some market value.  So I am not spending anything, and therefore cannot have any losses?

OM! Great conversation!

You are correct Hobby income doesn't pay SE tax but you also can't write off any expenses against it.

From your answers to the questions I would say you have Hobby income, The IRS usually questions business income and if you can't prove to the IRS it's a business then they consider it hobby income. I haven't seen them question hobby income and make it business income

Hi
I hope you are doing well

I talked to someone in your department about my tax filing forms and she did not have any idea about how we can file a 1099.NEC form that created by Amazon as a hobby income and she referred me to IRS but in IRS, nobody can answer my question, they asked me to file the form first then they will decide about it. How can we say that we did not receive any cash for amazon as Amazon vine members so we should not pay tax based on the Amazon 1099-NEC form. It is a very big problem for me now and i could not file my tax with turbotax now.

Best regards

If the 1099-NEC you received from Amazon represents hobby income, then you need to report this hobby income on your return.  In TurboTax, hobby income is entered in the Less Common Income section.  

If you are using TurboTax online, select Income & Expenses, scroll down the screen to Less Common Income.   You might have to click on the Show more drop-down arrow to reveal all of the options.  Click start across from Miscellaneous Income and enter your information on the subsequent screens.

If you are using TurboTax CD/download, the process is essentially the same.   Keep in mind that your expenses associated with your hobby income are not deductible.  In other words, you cannot use those expenses to offset your hobby income.  

@Milad2608

Thank you for your response. Amazon did not mention anything like hobby income or etc.In part 2 of 1099-NEC they wrote: "Payer made direct sales totaling $5,000 or more of consumer products to recipient for resale" but in reality, I did not receive any cash for this .

I received the item(it was free) and shared my reviews on the amazon website just for fun or a hobby.

There is no profit like cash for me. Your adviser told me I can not file it(1099-NEC)as hobby income but another adviser on your website wrote that I can file it as hobby income if I did not receive any cash or if there is no profit for me like cash (https://ttlc.intuit.com/community/self-employed-group/discussion/business-income-vs-hobby-income-vs-[product key removed]e-also-amazon-vine-program/00/2368482)

I am confused!

You are correct.  Amazon does not decide if this is hobby income or self employment income.  According to them, and based on your comments, you received product for your service as a reviewer, which is income to you.

You can decide if it is hobby or business income.  This IRS link will help you: Business or Hobby?

Key elements:

1. A hobby requires you to report the income you received and under the current tax law, Tax Cuts and Jobs Act (TCJA), no expenses are allowed to be used to reduce the money collected even if you itemize deductions.
2. A business allows you to deduct the costs necessary to obtain the income.  The law explains that 'you must be engaged in the activity to produce a profit'.  The test under IRS tax law is that you must show a profit three out of every five consecutive years to be considered a business.

Once you decide what type of income this is you can use the links below to see how to report.

• How do I report hobby income?
• Where do I enter Schedule C

@Milad2608

Thank you !

In online turbo tax,  in the section of hobby income we dont have 1099-NEC form and we have "income not on 1099-K" , so should i put my 1099-Nec information on "income not on 1099-K" form?

As @DianeW777 discussed in a prior post, if you have determined that the income in question is hobby income, then you can report it as such on your return.  In TurboTax online, hobby income is reported as follows:

1. In Federal, left margin, select Wages & Income.
2. On the Your income and expenses screen, scroll down to the last section, Less Common Income.
3. Click Start across from Miscellaneous Income, 1099-A, 1099-C.
4. On the next screen, Let's Work on Any Miscellaneous Income, click Start across from Hobby income and expenses.
5. Enter your information.

The 1099-NEC you received from Amazon is an important document, but only you can determine how such income should be characterized.  If it is hobby income, then follow the above stops.  

@Milad2608

@Milad2608 

I too had this issue and did not feel like the below advice to add it in the "Less Common Income" section made sense (since specific 1099-NEC is not able to be added there). SOOOO, I continued investigating and found that 1099-NEC info can be added under "Other Common Income" also in the Wages & Income section. When entering it here, you are given an option to select Hobby Income. Hope this helps!!! 🙂

I also received a 1099-NEC from Amazon. When I was entering my taxes with online TurboTax, I noticed when I searched for form 1099 – NEC, it asked to jump to the form and asked if I received a 1099-NEC and I clicked yes and added it. It then asks about who paid me and how the federal ID number was formatted, along with the other questions of what the reason for receiving the form 1099-NEC. Then it asks about uncommon situations that apply and one of the reasons is “this is not money earned as an employee or self employed individual, it is from a sporadic activity or hobby (this is not common). So my question is, should I be entering the information under the form 1099-NEC or under the less common income stated as hobby income? I feel like entering it under the 1099-NEC gives more opportunity to tell that it’s from Amazon and still can state it’s hobby income. 

Yes, this is what I just asked about. Makes much more sense to put it under the 1099-NEC form because you can put in Amazons tax ID number and that it’s the Amazon vine program. 

Absolutely, put it under the form 1099-NEC as long as you are able to indicate that the money is earned from a sporadic activity, then that's the way to go.

Hi!

I am in the same situation. I have been advised to first add my 1099-NEC under schedule C but then include a write off for the full amount, with a note that says it's hobby income and will be reported on Schedule 1. How would I do that on the software? I just want to make sure that the IRS software sees a schedule C with the uploaded 1099-NEC. 

With this software, if I only add it as hobby income under less common income, does a schedule C even get filled out? 

Long story short- I want to do it twice. first the regular way with a deduction for the full amount, and then a second time that lists it as hobby income.

thanks!

You either have business income to be reported on Schedule C or you have hobby income to be reported as Less Common Income.  If your 1099-NEC is for hobby income you can mark it as such, but you cannot deduct expenses from it.  You should consider the IRS opinion on hobby vs. business income to determine the correct area to report the form in TurboTax.

Per the IRS:

The IRS has specific rules regarding treating income as business or hobby income.  

To determine the difference the IRS considers these questions:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Does the taxpayer depend on income from the activity?
• If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
• Has the taxpayer changed methods of operation to improve profitability?
• Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
• Has the taxpayer made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

Also, the IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

@Gavmister 

Hi! 

Thank you for your reply!

To clarify- I am filing this as a hobby. I've looked over the criteria, and fully believe it's a hobby, and my CPA does as well (I filed with my CPA, this question I am asking is for my brother, who I am helping out, and he uses TurboTax Online). However, when speaking with him, he said his one fear here is since the 1099 is a NEC and MISC, the IRS will be expecting a Schedule C to be filled out.

Again, he still said we can file it as a hobby. But since the IRS will automatically want a schedule C filled out whenever someone gets a NEC, he suggested to fill out the Schedule C, then put in an "other expense" for the entire amount of the income, with a note that says "Non-SE income, filing as Hobby on Schedule 1, listed as Other Income." Then on the 1040, you list the amount to file as a hobby.

To reiterate- he thinks this is cleaner because he thinks if you ONLY do it as other income, especially when going through a computer system, he is afraid the IRS system might automatically flag a 1099-NEC without a corresponding Schedule C, EVEN IF filing as a hobby. So that is how he said he would file it if he was doing the taxes on his end.

Which brings me back to here- What I want to know is, if I put 1099-NEC as Hobby Income on the TurboTax Online filing system, how does that get sent to the IRS? I would imagine it's just on the 1040, and there is no corresponding 1099-NEC. So is this automatically going to be flagged when the two online systems talk to each other? Or does the IRS system see the 1099-NEC but also see that I selected hobby? 

Additionally, is there a way to do it the way my accountant suggested? Where I can add it as SE but expense it, then add as hobby as well?

Again, long story short- I know the differences between hobby and SE, and I know how and why my accountant would do his approach. But I also think it's different when filing on online software and want to be smart here.

Hope that made sense!!

If he has received a 1099-NEC then the issuer is required to file a copy of the 1099-NEC to the IRS.  TurboTax does not file a copy of the 1099-NEC with the return but the IRS does already have a copy of the 1099-NEC which is used to match up income that is placed on the return.  If you file a Schedule C and there is profits listed after the expenses are included, a Schedule SE will be created and self-employment tax will be included on the return.  If he meets all the requirements to file as a hobby he can continue to file as a hobby even though he received a 1099-NEC but if the IRS reviews and determines the income does not met all the qualifications to be categorized as hobby income he could receive a notice assessing the self-employment tax that was excluded from not filing a Schedule C.  

@Gavmister 

Thank you! Right okay, I'm fine with the idea of the IRS actually looking at it and then questioning, as long as it's an actual person taking a look. I have heard from some people that the first glance is just a software on their end, and it can automatically flag things like this.

But look, if this is something that many other TurboTax users have done, then I'm fine with this! I just want to make sure that this way of doing it doesn't AUTOMATICALLY flag something to the IRS. So if on the IRS side they see the NEC but then also see on this return that something was checked off as hobby, I would imagine that's totally fine, subject to their determination. But it wouldn't be some sort of automatic computerized flag. That's all I'm trying to avoid here. Does that make sense?

Yes, the return goes through a software screening with the IRS; the software checks figures to ensure the reported income matches what is listed in the software.  For example, if you receive a W-2 and the income was reported under other income instead of W-2 income, the software would flag this because the return doesn't show W-2 income.  Or if the 1099-NEC lists $40,000 income but income reported as other or Schedule C is $4,000, it would be flagged.  The computerized audit checks figures for matching records that were provided to them.  

@Gavmister 

Ah okay, that's super helpful. So just to make sure I am understanding clearly then- my question isn't about matching numbers, it's more about matching forms. So in my specific example- if all my reportable income matches, it's just on a schedule 1 and not a schedule C, then you don't think that the IRS software will automatically audit it, correct? I suppose if that was the case, then the software here wouldn't let me do that :).

But assuming all my numbers match, and I report the correct amount of income I just put it on schedule 1 as Hobby and not as Schedule C SE, then I don't need to worry that the IRS software with automatically flag it, I just have to hope that an IRS representative won't disagree with my approach. But it's not that the software flags it right off the jump.

Is that correct?

Yes, that is correct.  But do realize, depending on how much you are making, the chances of being flagged will be increased.  If you have a 1099-NEC from Amazon Vine and only had $1,000 of income, it would make sense that it was reported on Schedule 1 as hobby income instead of Schedule C.  If you have income of $40,000, it would be hard to sell the idea that this was hobby income and you were not doing with with the intention of making money.   

If this is truly hobby income, then it should be reported on Schedule 1.  It is is income from self-employment, then it should be reported on Schedule C. If you report it correctly, even if it raises a flag, there won't be anything to worry about because it is correct. 

"Again, long story short- I know the differences between hobby and SE, and I know how and why my accountant would do his approach. But I also think it's different when filing on online software and want to be smart here."   

All returns go through the same check as even the majority of returns filed with private practice CPAs are filed electronically. Just like TurboTax, the CPA can only include the information you give them on your return.  If you leave out a 1099 or a W2, the CPA has no way of knowing that, so to the IRS, having your return filed one way does not cause a bigger flag than it does the other way. 

Again, if your brother meets the criteria @AliciaP1 posted above for a hobby, then you should report it as a hobby on Schedule 1. If he does not, the report it on Schedule C as business income. 

got it, thank you SO much! it's approx 26k, but it's not really money. Amazon estimates a "tax value" of items that they send to us for "free" we just have to post an honest review on the Amazon website. None of the items get sold, I don't make a penny off of it. There are no detailed records, there is no business process or an LLC name, it certainly is not something we could live off of. It's just this arbitrary number that Amazon gives as a tax value, and then they compile it and send the 1099-NEC out. Up until two years ago it was a 1099-MISC, but now they changed it to NEC so everyone in the program is a bit nervous about it, because this isn't something any of us treat as a business or profit from, yet we all got NEC's. So just been figuring out the best approach,

The IRS considers receiving items in exchange for services as bartering.  Bartering can be subject to self-employment tax.  The items you personally are receiving may not allow you to live off of them, however, I would not try to pass a $26,000 1099-NEC off as a hobby.  This is the equivalent of a side job and is subject to Self-Employment Tax.  

You do not need to have a business name.  You do not need to sell anything. You do not need to have an LLC.  The Schedule C is also for individuals who perform services in exchange for compensation.  You are being compensated for a service (review) in the form of items that have value.  You likely have little to no expenses in the review process. 

It is not an arbitrary number.  It is the value of the items they are sending you. 

This income probably does need to be reported on Schedule C.