Hi WhyTaxMe,
That is a good question. First of all, whether the income is derived from hobbies or from self-employment, both are taxable.
For hobbies - If your activity is classified as a hobby, you will have to report any income you make from that hobby on your personal tax return, Form 1040, on Schedule 1, line 8, “Other Income.” This income would be subject to income tax, depending on your tax bracket.
Self-Employment income - is subject to both income tax and also self-employment tax of 15.3%. The 15.3% is a Federal "self-employment" tax. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). Yes, this must be paid and this is in addition to income tax. Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. However, you figure self-employment tax (SE tax) yourself using Schedule SE (Form 1040 or 1040-SR). Also, you can deduct the employer-equivalent portion of your SE tax in figuring your adjusted gross income. Wage earners cannot deduct Social Security and Medicare taxes.
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.
Here is a good article on what expenses can be deducted for self-employment business.
https://turbotax.intuit.com/tax-tips/self-employment-taxes/reporting-self-employment-business-income...
Hope this answers your question. Feel free to reply if you have any additional questions.
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