It’s so common these days for people to have a side hustle in addition to their regular job or business. And why not? A side hustle offers a great way to earn some additional income. That being said, a side hustle is sometimes less than an income source and more of a hobby. San Francisco businesses operate to make a profit while hobbies are for pleasure or recreation. And when it comes to the IRS and filing taxes, hobbies and businesses are treated very differently.
Whether someone is having fun with a hobby or running a business, if they are paid through payment apps for goods and services during the year, they may receive an IRS Form 1099-K for those transactions. These payments are taxable income and must be reported on federal tax returns. However, even if the individual does not receive an IRS Form 1099-K, they are still responsible for paying taxes on the income.
When it comes to a hobby, income must be reported on your tax return; but you can only deduct expenses up to the amount of income generated. As such, you’re not making money from the hobby. Additionally, these deductions are considered miscellaneous itemized deductions, which are currently suspended through 2025 under the Tax Cuts and Jobs Act. If the side hustle is classified as a business, you can deduct ordinary and necessary business expenses, even if they exceed your income. This includes costs for supplies, advertising, home office expenses, and more. Whether taxpayers have a hobby or run a business, good recordkeeping throughout the year is essential and will help when it comes to filing taxes.
The IRS suggests taxpayers answer the following questions to determine whether your project is a hobby or business.
- 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, and 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 they carry out the activity in a businesslike manner and keep complete and accurate books and records?
- Do the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business?
If you determine that your side hustle is more of a business than a hobby, be sure to take the necessary steps to legitimize the business. These include: registering your business with your state’s business authority, obtaining an Employer Identification Number (EIN) from the IRS, and opening a business bank account. Creating a business plan and marketing the business are also recommended.
Determining whether your side hustle is a hobby or a business is critical for San Francisco taxpayers. Be sure to evaluate why you are doing the work and what you hope to gain from it, whether it’s financial or simply satisfaction in other ways. Whatever your goals or profits may be, always consult with an experienced San Francisco tax attorney or tax professional before making decisions.
IRS Audit Tips
Allison Soares is a partner and tax attorney at Vanst Law LLP. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits from San Francisco to San Diego.
