How the IRS Treats Hobbies and Side Gigs for Tax Purposes

Making money from hobbies such as baking, blogging, or giving tours can be appealing, but the IRS still expects to know about that income.

In most cases, all income must be reported to the IRS, whether it comes from wages, Social Security, unemployment benefits, or another source. Earnings from a hobby are no exception, although they are handled differently from business income. Here’s what to know about staying clear of the side hustle tax trap.

Side hustle income usually has to be reported

Money earned from a side gig is generally taxable, whether it comes from a part-time job, a one-off assignment, or an online platform. The IRS says gig income must be reported even if no Form 1099 or W-2 is issued. Once self-employment earnings go above $400 for the year, reporting is required, and self-employment taxes may also apply.

That can lead to a tax bill that catches people off guard. Even a handful of Uber rides or a few pet-sitting jobs through Rover can count as taxable income. Setting aside money in advance can make tax time less stressful, which is why many people need to make quarterly estimated tax payments during the year. If you are unsure how much to pay, a tax professional can help.

The key distinction: hobby or business

The IRS treats hobby income differently from business income. According to the agency, the main difference is that businesses are run to earn a profit, while hobbies are done for enjoyment or recreation.

The IRS also says to consider whether you intended to make a profit, whether profit is likely in the future, how much money the activity brings in, whether you rely on that income, and whether you changed how you operate to improve profitability.

Income from a hobby generally is not subject to self-employment tax. However, expenses tied to a hobby are not deductible either.

Ways to stay organized and avoid problems

If you expect to keep earning money from a hobby, it can help to keep side hustle and personal finances separate. A separate checking account is a good starting point, and if the activity grows, you may want to form a business entity and open a business bank account.

It is also important to track income and expenses carefully. That helps you avoid underreporting earnings and also allows you to claim business deductions where allowed. Because no employer is withholding taxes for you, you will need to handle your own tax withholding through estimated payments.

Working with a tax professional can reduce common mistakes people make when turning hobbies into income. They can help explain the required forms and identify which expenses can be deducted.