Tax Tip 2023-61: Hobby or business: here’s what to know about that side hustle

Internal Revenue Service (IRS) sent this bulletin at 05/03/2023 10:20 AM EDT

IRS Tax Tips

May 3, 2023

Issue Number: Tax Tip 2023-61

Hobby or business: here’s what to know about that side hustle

Sometimes the line between having a hobby and running a business can be confusing, but knowing the difference is important because hobbies and businesses are treated differently when it’s time to file a tax return. The biggest difference between the two is that businesses operate to make a profit while hobbies are for pleasure or recreation.

Whether someone is having fun with a hobby or running a business, if they accept more than $600 for goods and services using online marketplaces or payment apps, they could receive a Form 1099-K. Profits from the sale of goods, including personal items, and services is taxable income that must be reported on tax returns.

There are a few other things people should consider when deciding whether their project is a hobby or business. No single thing is the deciding factor. Taxpayers should review all of the factors to make a good decision.

How taxpayers can decide if it’s a hobby or business

These questions can help taxpayers decide whether they have a hobby or business:

Do they carry out the activity in a businesslike manner and keep complete and accurate books and records?
Does the time and effort they put into the activity show they intend to make a profit?
Does the activity make a profit in some years – if so, how much profit does it make?
Can they expect to make a future profit from the appreciation of the assets used in the activity?
Do they depend on income from the activity for their livelihood?
Are any losses due to circumstances beyond their control or are the losses normal for the startup phase of their type of business?
Do they change their methods of operation to improve profitability?
Do the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business?

Whether taxpayers have a hobby or run a business, good record keeping is always key when it’s time to file taxes.

More information:
Publication 535, Business Expenses
Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C)
Small Business and Self-Employed Tax Center at IRS.gov Understanding Your Form 1099-K

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Tax Tip 2023-61: Hobby or business: here’s what to know about that side hustle

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Issue Number: Tax Tip 2023-61