1099-NEC Box 1 Sporadic Activity

[mantei64]

At some point in time, a company asked me if I would like to write reviews of products that they sell. In exchange for these reviews, they allow me to keep the product. I do not have a regular job. (I'm on disability.) I have never done anything like this before and just do it for fun. When looking at uncommon situations, would this be considered a sporadic activity or hobby? I do not receive any cash, just products that I review.

[HelenC12]

From the information above, it sounds like you have a hobby. Even if you don't receive cash, just products, you have to declare the fair market value of the item as income. Per IRS, all income needs to be reported, even if it's from a hobby.

The IRS has nine things you must consider when determining if an activity is a hobby or a business:

• Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.
   
• Whether the time and effort the taxpayer puts into the activity show they intend to make it profitable.
   
• Whether they depend on income from the activity for their livelihood.
   
• Whether any losses are due to circumstances beyond the taxpayer's control or are normal for the startup phase of their type of business.
   
• Whether they change methods of operation to improve profitability.
   
• Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business.
   
• Whether the taxpayer was successful in making a profit in similar activities in the past.
   
• Whether the activity makes a profit in some years and how much profit it makes.
   
• Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.

As of 2018, you can no longer deduct hobby expenses from your federal taxes. However, some states pull in hobby expenses from your federal return to deduct them at the state level.

To enter Hobby Income (and expenses) as other reportable income:

1. Sign into your TurboTax account.
2. Select Pick up where you left off or Continue your return.
3. Select Federal from the left side menu.
4. Type other reportable income in the search bar and click on the Jump to other reportable income.
5. On the Other Wages Received screen, select No at Did you receive any other wages? 
6. If the “Jump to” feature doesn’t work, on the Wages and income screen, scroll down to Add more income. If you don’t see this, scroll down to Less Common Income and select Show more and scroll down to Miscellaneous Income, 1099-A, 1099-C then Start/Revisit.
7. On the Let’s Work on Any Miscellaneous Income screen, scroll down to Hobby income and expenses, Start or Revisit.
8. Continue with the onscreen interview until complete.

[mantei64]

I've seen this information before. My question really relates to the TurboTax screen that asks if any 9of these uncommon situations apply. If I select the option of "This is not money earned as an employee or self-employed individual, it is from sporadic activity or hobby (this is not common." it increases the amount of both federal and state refunds. If I select "None of these apply to me", the refunds decrease, and then it wants me to enter business information that I obviously don't have. I'm not sure how to proceed.

[HelenC12 · Accepted solution]

As stated in my previous answer, it appears you have hobby income.  If you select "none of these apply to me" you're indicating that this income is not hobby income but self-employment income.

When you have self-employment income, you have to pay self-employment taxes (Social Security and Medicare) and those taxes are added to the amount of taxes you should pay on your income therefore decreasing your refunds.

• The SE tax rate is 15.3% with 12.4% for Social Security and 2.9% for Medicare.

[rickwm]

I have a similar but slightly different situation.  I am retired and receive ample income from social security, pension and investments.  I do not "need" any kind of part-time job or self-employment income.  As a pastime, I fill out surveys on a fairly regular basis and every now and then one of them results in a paid interview.  On average I do perhaps 5 or 6 paid interviews a month, which I do over Zoom from a private room in my home.  I do these for fun because I enjoy sharing my thoughts on various topics, but I do earn money from them. 

In 2022 I received a 1099-NEC for approximately $1400 in income from these interviews.  This was the first year I received a 1099 for this pasttime.  Although the income was reported on a 1099-NEC, and although I do this activity on something more than a sporadic basis, I consider this hobby rather than business income for the following reasons:

1)  I do not have a business plan, a website, business cards, etc or do any kind of marketing for this.  I do not hold myself out as a consultant or anything similar.  I simply fill out surveys and do interviews when requested.

2) I do not keep detailed records of the calls or any kind of bookkeeping as would be associated with a business.  My only real records are the email notifcations I receive when I have been chosen for an interview.

3) I do not depend on this activity for a living as I am retired and receive ample income from my normal retirement income.  

4)  I have no previous experience with any kind of self-employment or part-time activity and all previous business experience was from regular W2 employment which ended when I retired 10 years ago.

5)  While I do earn money for these activities, I have never made any effort to determine whether this would be an actual profit for me since I have made no effort to calculate what my expenses would be if this were an actual business.  For example, I use a laptop to do the interviews which I just purchased last year.  I know that if I were considering this a business, I could depreciate much or even all of the cost of that laptop, and I could also allocate a portion of my monthly internet expense, as well as perhaps a portion of the costs associated with the room in my house where I do the interviews.  I have never made any attempt to calculate any of that.

So based on all of this, is it reasonable for me to consider this to be hobby income as opposed to business income?  When I look at the nine factors the IRS supposedly considers in evaluating whether something is hobby income or business income, I would be hard pressed to answer any of them in the affirmative.  

[GeorgeM777]

It appears that your approach seems reasonable.  Arguably completing the surveys, and conducting interviews five to six times per month, could be viewed as a fairly regular and continuous activity and not sporadic.  Performing an activity, and getting compensated, on a regular and continuous basis is one factor the IRS will consider in deciding whether you are engaged in a business activity as opposed to a hobby.  However, the list of factors the IRS considers are not all inclusive and moreover, no one factor is greater than another.  

Ultimately, the question of whether you are engaged in a business activity versus a hobby is a question of fact and it appears you have done the research/analysis to conclude your survey/interview activities is not a business.  

To report this 1099-NEC as other income, in TurboTax online, click on Wages & Income, scroll down the page to Less common income, click on the drop-down arrow and select Miscellaneous Income.  From the list select Other reportable income and respond to the questions on the screens that follow.   If using TurboTax CD/download, the process is essentially similar.  

You cannot deduct any expenses against hobby income.  Therefore, if you did incur expenses in connection with your activities, you will not be able to deduct such expenses.  

@rickwm 

[aprcox20]

My husband is a student-minister and teaches a class when asked.  He is not an employee, nor is self-employed.  What is the appropriate selection?  He does purchase books for school and at times purchases materials for ministry, can I still claim that?

as far as the NEC, I selected this income is not earned as an employee or self-employed…. Is this correct?

[DaveF1006]

if he does teach a class occasionally and if this is ongoing, then it should be treated as self-employed income. You might not consider this a business but he is a contractor in the sense that he does this whenever he is called to teach a class. it's occasional but ongoing and happens more than once.

As a contractor, he is eligible to claim all the expenses that are necessary for his work including materials and supplies. 

@aprcox20 

[rickwm]

I guess I have to ask why is this any different from the situation I reported earlier in this thread.  I do occasional surveys online which sometimes lead to interviews for which I am paid.  Although the activity is somewhat continuous (I average 5 to 6 paid interviews a month) and certainly not a one-time activity, I do not think of it as a business, I do not keep business records or have a business plan, etc., I don't depend on it for income, I don't do any marketing and I don't track expenses.  More to the point, if you look at the IRS definitions on what constitutes a business, it states:  "Taxpayers should consider nine factors when determining whether their activity is a business or a hobby, and base their determination on all the facts and circumstances of their activity."  The nine factors are:

• Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
• Whether you have personal motives in carrying on the activity.
• Whether the time and effort you put into the activity indicate you intend to make it profitable.
• Whether you depend on income from the activity for your livelihood.
• Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
• Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
• Whether you were successful in making a profit in similar activities in the past.
• Whether the activity makes a profit in some years and how much profit it makes.
• Whether you can expect to make a future profit from the appreciation of the assets used in the activity.                                                                                                                                                                                              In my case, at least, when I went though each of those nine items, it was obvious that my activity is not a business but more of an income-generating hobby.    At first glance, I would think the student who does occasional teaching as a way of helping out in the classroom may fit into this category as well, no?

[AmyC]

You are looking at this from a position of income vs the IRS which sees people writing off business losses that really should not be. The 9 factors help to determine when the IRS can say the losses are not deductible. If a person is regularly engaging in an activity and making money successfully, putting in time and effort, knowing what to do to keep making money, profit in the past and expected profit in the future are a good foundation for a business.

If the teacher does it one time for kicks, it isn't a business. Knowing how to teach and expecting to continue, makes it a business and allows the deduction of the books.

I agree with @GeorgeM, this is a gray area and you have done your research and analysis. If the IRS decides to audit you, you have answers ready. You are reporting income and paying tax rather than writing off tons of expenses and claiming a loss.

@rickwm