The IRS has some thoughts.
Distinguishing between a hobby and a business is confusing at times, yet it holds great significance, especially when it comes to taxes. The main difference lies in the purpose of they activity: Is it a business attempting to generate a profit? Or is it a hobby for recreational pursuits?
Be mindful of online sales.
Whether you’re engaged in a hobby or business, receiving more than $600 for sales through online marketplaces or payment apps can trigger the issuance of Form 1099-K. Such profits, even from the sale of personal items or services, qualify as taxable income and must be reported on tax returns.
Determining whether an endeavor falls under the category of a hobby or a business involves considering several factors, as no single aspect serves as the decisive factor. It is crucial for taxpayers to evaluate all relevant elements to make an informed determination.
Signs that your side hustle is a business.
To assist taxpayers with determining if they have a hobby or a business, the following questions can provide valuable insights:
- Do you approach the activity in a professional manner, maintaining thorough and accurate financial records? (If not, we recommend a platform like QuickBooks.)
- Does the amount of time and effort you invest in the activity indicate an intention to generate profits?
- Has the activity demonstrated profitability in some years, and if so, to what extent?
- Can you anticipate future profits through asset appreciation in relation to the activity?
- Does your livelihood depend on the income generated from the activity?
- Are losses due to circumstances beyond your control, or are they typical for the startup phase of your particular business?
- Do you adapt your operational methods to enhance profitability?
- Do you possess the necessary knowledge, along with guidance from advisors, to run the activity as a successful business?
If you answered “yes” to some of the items above, it’s likely you’re running a small business and should consult a CPA to make sure you meet your tax obligations. Nobody likes surprises at tax time. Peace of mind is achieved with intentional tax planning and estimated tax payments.
Work with a CPA firm that specializes in small businesses taxation.
Have a growing side hustle and you’re wondering about the tax implications? We are a CPA firm that supports entrepreneurs. Contact us today to set up a tax advisory meeting or send an email to: admin@wgcpa.com.