Turning a passion project or freelance gig into extra cash is a classic move, but it comes with a major compliance hurdle. Whether you are selling digital products online or picking up local client work, the IRS demands that you report every single dollar of that income. However, whether you can deduct your expenses depends entirely on whether the tax collector views your side hustle as a legitimate business or just a hobby.
Summer Activities That Could Impact Your Next Tax Return
While the spring tax deadline is behind us, what you do during the sunnier months can directly influence what you owe—or get back—when it is time to file again. Taking a few proactive steps now can save you from an unexpected tax bill later.
The IRS Criteria for Distinguishing Hobbies From Businesses
Turning a favorite pastime into income can be rewarding, but it raises an important tax question: Is the activity a hobby or a business? The answer matters because different tax rules apply to each.
All income must be reported on your tax return, regardless of whether it’s from a hobby or a business. But related expenses (and losses) are deductible only if the activity is a business.
The Difference Between a Hobby and a Business
A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. In contrast, people operate a business with the intention of making a profit. However, many people engage in hobby activities that turn into a source of income, and determining if that hobby has grown into a business can be confusing. For instance, many people may have started making handmade items and selling them for a profit during the pandemic.