How the IRS Treats Side Gigs and Hobbies at Tax Time

Activities like baking cakes, launching a blog, or providing tour guide services can turn a personal hobby into a source of income. Even so, the IRS still wants a share of that money.

As a rule, 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 different in that respect, although they are handled differently than business income. Here is what to know to avoid a side hustle tax surprise.

Must Read

Side hustle income generally has to be reported

Money earned from a side gig is usually taxable, whether it comes from part-time work, short-term jobs, or online platforms. The IRS says gig economy income must be reported even when no tax form, such as a Form 1099 or W-2, is issued. In many cases, reporting is required once self-employment earnings top $400 in a year, and self-employment taxes may also apply.

That can create a significant and unexpected tax bill, often described as the side hustle tax trap. A handful of Uber rides or a few pet-sitting jobs booked through Rover can still count as taxable income. Putting money aside during the year can make tax payments easier when they come due, which is why quarterly estimated taxes are often necessary. If you are unsure how much to pay, a tax professional can help.

Hobby or business: profit intent is the key difference

The IRS treats hobby income differently from business income. According to the agency, the main distinction 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 profits seem likely in the future, how much income you earned, whether you rely on the money, whether you changed your operations to improve profitability, and other factors.

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

Practical steps to stay out of trouble

If you expect to keep earning money from a hobby over time, it often makes sense to keep personal and side hustle finances separate. A separate checking account may be enough at first, but 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 makes it easier to claim deductible business expenses. You will also need to handle your own tax withholding, since no employer is doing it for you.

Working with a tax professional can help you avoid common mistakes when turning a hobby into a profitable side business. They can guide you through the required forms and help confirm which expenses qualify for deductions.