Great question! Side gigs like selling goods online, delivering food, or starting a ridesharing business are common ways people earn extra money. If you have a side gig where you earn income, you’re required to report that income. The question then becomes, is my side gig a hobby, or am I operating my side gig as a business with the intention of making a profit? This makes a difference in how your side gig income is reported on your tax return.

If your side gig is a for-profit business, depending on its structure, you’ll report the income and all ordinary and necessary expenses on a Schedule C. You’ll file the Schedule C with your individual tax return, and it will be subject to self-employment tax. If your business is a hobby you are required to report your income on your individual tax return, but you’re unable to claim any related expenses as deductions.

The IRS states that a hobby is any activity that a person pursues because they enjoy it and they have no intention of making a profit. The factors listed below can help determine if your business is for-profit or a hobby:

For-Profit Business:

  • You carry out activity in a businesslike manner and maintain complete and accurate books and records.
  • You put time and effort into the activity to show you intend to make it profitable.
  • You depend on income from the activity for your livelihood.
  • Losses are due to circumstances beyond your control or are normal for the startup phase of this type of business.
  • You make a change to methods of operation to improve profitability.
  • You and your advisor have the knowledge needed to carry out the activity as a successful business.
  • You were successful in making a profit in similar activities in the past.
  • If your activity makes a profit in some years, the amount of profit it makes in these years can be a determining factor.
  • You can expect to make a future profit from the appreciation of the assets used in the activity.

Hobby:

  • You have personal motives for carrying out the activity such as general enjoyment or relaxation.
  • You have enough income from other sources to fund the activity.

The IRS is clear that no one factor is important than another when determining if your business if a hobby or for-profit.