Have a hobby that’s become a passion? Maybe you’ve been crafting decorative wreaths to sell at local street fairs. Or perhaps you turned your love of fashion into a small side hustle, reselling thrifted treasures or styling your friends for big events.
Anytime money is exchanged for goods or services, the IRS will expect their cut. With part-time gigs becoming a more common way to generate income, here’s what you need to know from an IRS standpoint.
Defining hobby vs. business
The IRS considers a hobby any activity that’s engaged in primarily for pleasure, recreation or personal fulfillment — not for profit. But there are exceptions. For example, if you occasionally sell your homemade quilts at a yard sale and make a few bucks, it’s not typically considered taxable business income.
On the other hand, a business is an endeavor undertaken with the intention of making a profit. The key here is your intent.
You might not be profitable yet, but if your goal is to make money, the IRS may consider this a business. Other factors indicative of a business (according to the IRS) include whether or not you:
- Maintain complete and accurate books and records
- Put time and effort into the activity, demonstrating a plan to make it profitable
- Depends on the income generated from the activity
- Have been successful in making a profit in similar activities in the past
- Expect to make a future profit
Understanding the implications
Whether it’s a hobby or business, maintaining thorough records is crucial for potential dealings with the IRS. For hobbies, keep track of any income earned, especially if you’re generating sales through a payment app. If you receive a Form 1099-K, you’ll need to report the earnings.
For businesses, you’ll also want to record and report all income and expenses. You may also make applicable deductions. Keeping meticulous records will not only help at tax time but can also provide valuable insights into your business’s financial health. Be sure to regularly review your finances and adjust your strategies as needed.
For fun and profit?
The last thing any taxpayer wants is a surprise letter from the IRS. As your hobby grows, or if you’re considering turning your passion into something more, get up to speed with the tax implications. The experts at Magone & Co can help. For tax planning guidance, give us a call today at (973) 301-2300.
This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation.