Recent years have seen a rise in the number of people pursuing “side hustles,” such as delivery driving, dog walking and online craft selling. Many of these activities could be classified as either hobbies or business ventures, depending on how you pursue them. Since different tax rules apply for businesses and hobbies, it is important to know how the IRS will likely classify your side gig. The IRS considers a variety of questions, including:
– Do you depend on the activity for your livelihood?
– Do you pursue the activity in a professional, businesslike manner, and keep detailed records?
– Is the activity currently profitable for you, and if not, is there good reason to believe it will become consistently profitable in future years?
– Do you have the knowledge and skills needed to pursue the activity as a business?
– Do you approach the activity in a way that shows the intent to make a profit, such as changing methods to boost revenues?
In many cases, business income is subject to both income and self-employment tax, whereas hobbies may be subject to income tax. However, pursuing an activity as a business may enable you to reduce your taxable income by deducting business expenses, such as supplies, business vehicle use, and home office costs. Our tax professionals at RTW Xxact Enterprises, LLC. can help you determine how your side gigs should be classified, and how to account for that classification in your tax planning.