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

[Gavmister]

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!

[AliciaP1]

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 

[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!!

[BrittanyS]

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 

[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?

[BrittanyS]

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 

[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?

[Vanessa A]

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. 

[Gavmister]

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,

[Vanessa A]

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. 

[chriscampbell]

There is no profit. All items that are received are used to write a review of said item. The item is then considered a used product and value is reduced between 40% to 90% in approximation. If you go to a garage sale, think of it that way. The fact is, you are not able to resell for 6 months per contract with amazon. You cannot return the item. They don't want you to in general because it cost more to have something returned than to sell it. If you will not, cannot sell the item for a value. Contractually and even if you could, after use it's value is depreciated, to a detriment. What is this considered? I have yet to find anyone willing or able to explain this. IT is not income. Since Amazon CHARGES LLCs and small businesses to enroll in this program and to fulfill this program, the taxable income should fall their way. They chose to not do this but that is their choice. It isn't mandatory to be apart of this program. IT isn't income and IF I were to pay to use services from Inuit TURBOTAX. I would expect an answer with confidence that they are going to BACK once the audit comes. You have somewhere around 20k to 50k. Estimation based on websites with groups for only Vine members. Subtracting 20% for duplicate subscriptions. That's just what I've seen doing research to figure this out. Give an answer that can be backed up come the audit of the 50k people or so. I pay for turbotax and I will be happy to go somewhere else and make sure I use the fact that you cannot give an answer that isn't short for, I am playing it safe because I have no clue. Then when it comes to the audit you leave us high and dry.   

[Anonymous_]

@chriscampbell 

Note that you can purchase audit defense if you are concerned.

https://intuit.taxaudit.com/prepaid-audit-defense-1

Note that no one is going to guarantee that any answer is 100% defensible nor all positions taken be accepted by the IRS and virtually no one is going to pay any additional tax, interest, or penalties you might owe if any particular position is not accepted. 

If you are overly concerned, it might be wise to take the most conservative position.

[chriscampbell]

No one ever said , pay any portion of any tax, fee, penalties that occur due to information given.Asking someone with better knowledge on this and wisdom based experience in a field that is as confusing to regular people as it is Experts and as it is to the people who write the laws isn't something people look at contractually. I would think giving their BEST educated point of view would be the way to go. With an attempt to gain the correct information. If several do this, as they should, some sort of consensus could be made and give the feeling of having left with more information and less confusion than when the question was asked.  If someone answers who isn't able to provide anything other than a best guess, than stating it as such should suffice. Getting as many people to reply as did here, that basically all say go here and go there and read. That is literally what this site was made to help you not do. It's made so that you can rely on someone else's education and time and devotion to a study and field to guide you through a process. This is why money is exchanged. This is what is brought to the table. If it's something out of the normal realm of understanding than a disclaimer of such would be all that is required and the ability to give educated answers and options would be better than a web of confusion. At some point escalate the issue to someone with more experience.  If it's not understood in whole by the person answering. How about go to amazon.com/vine and do research. If you just don't know, don't respond. It is however, 2023 and expecting anything from anyone even if it's a service that makes a ton of money off individuals using their service. Definitely a service that makes money scamming majority of people by utilizing the fact that this is a confusing and misunderstood field and using the psychology of how people browse and their inability to comprehend everything needed and they simply do not understand what should and shouldn't cost them. To SUM, taxes suck because it's made to. This site should be a place to simplify and inform, as it presents. How about just doing that?

[Anonymous_]

---

@chriscampbell wrote:

I would think giving their BEST educated point of view would be the way to go.

---

I agree with your statement that is quoted above in the vast majority of instances, but there are areas of the law and facts to which certain laws and regulations are applicable that are not black and white (i.e., unclear).

With respect to the latter what, exactly, are your expectations in terms of support after the fact? If you're looking for someone to offer an opinion on a particular grey area of the law as it applies to a certain fact pattern and then pay any taxes, penalties, and interest if the IRS does not accept that position, you are not going to find that here or anywhere (and that was my one and only point).

[Milad2608]

TurboTax doesn't offer good value and doesn't seem to care about the customer or their problems. They appear to prioritize profits over everything else. On the other hand, I prefer using an app like this because I'm not comfortable sharing my information with unknown individuals until I can find a trustworthy agent. As for Amazon Vine, it doesn't provide any benefit if your cost of living allows you to support yourself. The approach I've found most effective for filing taxes with Amazon Vine is to classify myself as self-employed. This way, I can claim expenses related to my car and house, although it still doesn't seem to be worth it.