Hobby income / 1099 misc

[sarahrose-cohen]

My husband and I work in editing and finance, respectively, and we both have some additional income for music-related activities (singing and clarinet playing). We both received multiple 1099-miscs for 2016 for musical activities. I consider music income to be hobby income for each of us, even though we make a profit doing it, because profit is not our motive. My understanding is that we shouldn't need to pay payroll taxes on hobby income. However, since we recieved 1099-miscs for the work, the only way I can figure out to get TurboTax to not deduct payroll taxes for that income is to state that 1) the work isn't related to our core work (this is true), 2) we don't do the work to make a profit (also true), and 3) that 2016 is the only year we expect to receive it. This last part is not accurate. Is my understanding of what qualifies as hobby income incorrect? I don't see why having it multiple years in a row should mean that it counts as non-hobby income.

[NancyG · Accepted solution]

I have attached a whole lot of information to help you understand.

If there are expenses associated with your income, it would not make sense to classify the work as hobbies.  The expenses would only be deductible as itemized deductions subject to a 2% adjusted gross income floor. 

The recordkeeping and tax reporting is less with a hobby.  

I also wanted to clarify a point for you -  if you earned less than $600 your hobbies, the payer doesn't have to send you a 1099 form, but you still have to report the earnings.

Discussion - Hobby or Self-Employment

First, ask yourself if your hobby is a recreational pursuit or a profit-making endeavor. Earning a living doing something you love is a natural goal, but you must be clear about your intentions to claim expenses come tax time.

The IRS defines a hobby as an activity:

• You do purely for the love of it, regardless of the cost.
• You expect no profit in return.

This doesn't mean you're prohibited from earning any money. For example, if you tinker with cars, it's okay for a friend to pay you for an occasional oil change.

Generally speaking, your hobby is a business if:

• Some or all of your income comes from the hobby. For example, you sell handmade candy on an e-commerce store, and the earnings account for half of your annual income.
• Your hobby experiences profits and losses. For example, you earn significant profits from Valentine's Day sales, but you've spent too much on a flavor of Halloween candy that didn't sell.

Additional resources:

4 Tax Tips for Money Making Hobbies

 Side Giggers - Tax Tips for Side Jobs

When the IRS Classifies Your Business as a Hobby

 Tax Tips for Freelancers - Contractors and Consultants

The Self Employment Tax

[sarahrose-cohen]

Thanks for your response. This website clearly states that hobby income is not subject to self-employment tax, which is why I thought this was the case: <a rel="nofollow" target="_blank" href="http://www.accountingweb.com/tax/irs/hobby-or-business-tax-preparer-due-diligence-part-1">http://www...>

[NancyG]

What you are asking is beyond the scope of this service.  If you want to continue calling it hobby income and not subject it to self-employment taxes.  You should come up with some good reasons for calling it such as it continues each year (especially if the income grows each year).  I skimmed the article.  As you probably read calling your income "hobby" income is not black and white - it is grey and should be well backed up in case of audit.

[your friend in the devil]

Generally speaking, your hobby is a business if:

• Some or all of your income comes from the hobby.

Some or all?

Meaning your hobby is a business. 

Wow.