tax tips — September 12, 2016

Taxes for the Side Hustle

by Susannah McQuitty

An artist’s desk, covered with pens and notebooks, sneakers and headphones

If you’ve gotten on Pinterest – I don’t know, at all – you’ve definitely seen half a billion ways to start a “hustle,” which is pretty much any way to earn a bit of extra cash to use as you like. A lot of people take their hobbies and turn them into hustles, because if you’re doing something for fun anyway, why not make a little money?

Here’s the thing: You still have to pay taxes on a hustle – probably. How do you know? You’ve got to determine if your hustle is just a hobby or a business. If you look at the guidelines the IRS uses to distinguish between a business and a hobby, it can be hard to point to where the line falls between the two. The biggest determinant is whether your activity is simply self-sustaining or if it’s supposed to generate a profit. Where taxes are concerned, how doesn’t matter as much as why you start a hustle.

Let’s look at it this way: You either start a side hustle to raise money, to spend money, or to keep up a hobby.

Side hustles for hobbies

What’s the why of a hobby? Fun. Well, that and being able to keep having fun. This is the easiest kind of hustle you can have, because you’re not really looking for a profit. You’re only making sure you have the money to keep doing what you love. Say, for example, that you love to hike. If you start an Instagram account dedicated to your excursions and start making money from your profile, spending all your earnings on hiking gear, gas, and other necessary expenditures means you don’t have to pay taxes for your hiking income.

The key is that hobbies may be self-sustaining but cannot generate a profit. That means that whatever you make off the hobby goes back into it. Use your hobby to make a little spending money? Congrats, you’re a small business.

Pens, pencils and paintbrushes next to a drawing mannequin

Side hustles for spending money

We usually think of small business owners as people like your Uncle Jimbob, who runs a mom-and-pop store and employs a couple of teens to play on their phones and occasionally help around the shop. The IRS, on the other hand, counts you self-employed if you consistently make a profit year-to-year.

Okay, so how much profit is enough to turn your hobby into a business? It boils down to this: If your hobby makes a profit of more than $400 during the year, you have to report that money as income. Do that for three out of five years, and, in most cases, the IRS officially counts you as a small business.

The good news about being a business is that you can deduct losses from your overall income when tax season rolls around. Let’s go back to the hiking illustration: If you lose money from your hiking hobby, you can only deduct as much money as your hobby income brought in. If you’re a business, on the other hand, then you can deduct the loss from your overall income.

So where do you fall?

Keep track of what you earn and what you spend your earnings on, and it won’t be hard to determine whether you’re a hobbyist or a small business owner. If you spend more than $400 of your hobby-related earnings on something unrelated to your hobby, you’ve got to report it as profit. If you use most of your earnings on fueling your hobby, though, you should be fine.

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