Your handcrafted jewelry has been a hit at the local market or maybe your web design skills have attracted consistent freelance work. Either way, congrats on a thriving side hustle! But when does a side hustle transform from a hobby to a business? The Internal Revenue Service (IRS) certainly is interested in the answer, and the classification can greatly impact your tax obligations.
This is why it matters
When operating a business, you’re permitted to deduct all ‘ordinary and necessary’ expenses, even when they surpass your income. Conversely, with a hobby, expenses can only be deducted to the extent of income produced by the hobby, and only if you itemize deductions.
Check the criteria used by the IRS
You can familiarize yourself with the IRS’s criteria to distinguish a hobby from a profit-making hustle at https://shorturl.at/sENVY. The criteria include:
• Is the activity managed in a business-like manner?
• Do you alter operational methods to boost profitability?
• What is your level of expertise in the activity?
• Does the activity constitute a primary source of your income?
• Do you anticipate making a profit?
• Is the activity profitable in some years?
• Are there elements of personal pleasure or recreation in the activity?
To comply with IRS regulations, maintain comprehensive records of your side hustle activities. Record income, expenses, time spent, and any steps taken to expand and profit from your side hustle.
Disclaimer: This post offers general information and should not be taken as financial or legal advice. Consult with a tax professional for guidance based on your specific circumstances.
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