Freelance, Hobby, & Spring Cleaning Questions

[H_Roper]

Hello and thanks for hosting this event! 

I'd like to know more about the $600 limit for self employment or side hustles and what it means for me, as some of the information I've found isn't the most clear. 

I have a full time job, employed in Arizona. In the past I've picked up odd jobs - house/pet sitting, graphic design, and selling old collectables or household items I no longer need. I've hesitated with any side hustles lately because I don't want to report incorrectly and be audited, and don't want to put in extra effort if any small amount of income I'd make is taxed based on self employment and I only break even. A few different scenarios below that I'm curious about. 

1) I have a hobby where I purchase collectables for myself. Sometimes I buy one and decide I don't like it - whether I just opened the box and dislike it, or a year or five later when I no longer want it in my collection. Sometimes I don't have the receipt available to prove what I purchased it for - online is easy enough to show, but often I'll purchase in person from other collectors and it's not the sort of thing where you make a reciept (like old school trading Pokemon cards). How do I show I'm not making money on this sale (possibly even at a loss with shipping factored in), or not making much? It's a hobby not a business, and sometimes I just sell the collectables I no longer want in my collection. 

2) Similar to the above, but in the past I've sold old household things online using Mercari. Shoes or an outfit that came in the mail and didn't fit me, a bracelet I no longer like, etc - just small things to tidy up my home and that are still good enough for someone else to use. 

3) Within the aforementioned collectable hobby, people create and sell artwork based on the collectables. I've thought about doing this, but needing to report on my taxes that I'm self employed makes it all more confusing and although I want to sell my artwork, I don't want to make a mess of my taxes, as I do them myself using TurboTax. I don't think I'd be making more than $600, but a single collectable artwork could sell from $20-300, so there's the possibility to go over $600 if I sell a lot. Even so, I'm not a small business (yet), but all of my art supplies have cost a lot of money over the last few years. And buying/producing doesn't all happen within the same year - I've bought a lot of art supplies in the last four years and I'm just now starting to produce artwork for myself, and to gift to friends/family. I'm just not sure how to go about this; if I did decide to sell my artwork in the future, I don't understand how have it be straight and clear with taxes and still make a bit of money for the work I've put in. 

4) Furthermore, in the past I've done graphic design on the side. It's never been more than $600, but what tax reporting do I need to do if it's less/more than $600? 

5) What about any combination of hobby/artwork/graphic design/other income? Whether selling my hobby collectables, selling my artwork, providing graphic design services, or selling off old household items I no longer need - how does the combination of these things add up to impact my taxes? I want to ensure my own financial/tax safety and understand but it all seems so confusing, especially for someone who hasn't run a business and does their own taxes. Thank you very much for the help and insight - I appreciate this opportunity! 

[NancyM5]

The $600 limit regarding self-employment income is only for reporting purposes.  You will received a 1099-NEC or 1099-K if the amount paid to you exceeds $600.  As taxpayers we are required to report all income even if the amount is less than $600.

Hobby:  You must use your best effort to find and report what you paid for any items you sell.  Obviously, a receipt is the best record of the amount paid, but you may be able to locate the fair market value of an item with a bit of research.

Old household items: If you are in the business of reselling items, then this would be taxable income.  However, if you casually resell items you've previously worn and have no intention of making a profit on those items, then this is not considered self-employment activity by the IRS.

Art Work:  Art work you sell is taxable income even if you sell it for only $20.  As I stated above, the $600 limit is only for those reporting income to you on 1099 Forms.

Graphic Design:  The income you receive is taxable.  There is no $600 minimum; that is for Form 1099 reporting purposes only.

Combination of factors:  If the items you're selling would be classified as a business, then you would report your income and expenses on Schedule C.  This article details how the IRS classifies your activity as a hobby or business:  When the IRS Classifies Your Business as a Hobby.  It's important to track your expenses whether you have a hobby or a business so that you can take deductions against the income received.  This is a good summary of business (or hobby related) expenses:  Taking Business Tax Deductions. The primary differences between a hobby or business on your tax return is (1) where you report the income and expenses and (2) hobby expenses can never excess hobby income, but you can report a business loss.

[Opus 17]

To start with, you need really good records.

1. A side gig is a business or a hobby depending on factors identified by the IRS.  See here. 

https://www.irs.gov/newsroom/heres-how-to-tell-the-difference-between-a-hobby-and-a-business-for-tax...

A business is reported on schedule C.  You report gross income and expenses, and pay income tax and self-employment tax on the net profit.  You need a separate schedule C for each business.  Businesses with substantially similar activities and expenses can be combined.  If you do rideshare, deliver meals and groceries that's all basically one business with similar activities and expenses (driving and mileage).  But rideshare and housesitting would be separate businesses and be reported on separate schedule Cs.

2. A hobby is reported in one of two ways depending on what you do.  

I will discuss buying and selling items (including collectibles) first.  

Selling tangible personal property is a capital transaction reported on form 8489 and schedule D.  If you sell for more than your cost basis, you have a capital gain.  If you sell for less than your basis, you have a capital loss.  However, capital losses on personal property are not deductible and do not offset your gains.  So if you sell 10 items with a combined loss of $1000 and one item with a gain of $10, you have a $10 capital gain.  

You need a spreadsheet listing your items with a description, date purchased, cost when new, date sold, and selling price.  If you don't have receipts, make your best guess and hope you aren't audited.  Without proof of your cost, the IRS would be allowed to disallow your costs and declare the entire proceeds as taxable income.  A listing made at the time of sale is better than nothing, but not as good as receipts.  

If perform a service other than selling tangible property, that income is reported as hobby income or "other taxable income" on your tax return.  That would include "making" a collectible object (like, making art from found objects).  You report the gross income and you can't deduct any expenses (such as tools, supplies, shipping, and so on).   If you are performing the activity with a profit motive, it may be a business, even if the sales volume is low.  Refer to the multi-factor test above.  If a business, you report it on schedule C.  You can deduct costs for supplies, tools, listing and selling fees, shipping, and so on. 

3. For your graphic design side gig, there is no income threshold.  If you file a tax return for any reason, you must report all your income, no matter how small the individual items are.  Again, you can either report it on schedule C as a business activity or as hobby "other" income.