If you earn a little extra money on the side, what qualifies as self-employment and what is simply a “hobby”?

I have had a small self-employment online business, but I am shrinking it down. I never earned as much money as I hoped, and I am tired of keeping track of expenses and earnings for income tax. Is there a dollar amount at which this would no longer be considered self-employment but simply a hobby? I like helping people (life coaching) but I am reaching retirement age, and would just like to maintain my three existing clients and forget about the "business" aspect. Is there any way to do this?

If your income doesn’t exceed your expenses, it’s a hobby. An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year.
If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income.
What are allowable hobby deductions under IRC 183?

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:

Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

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3 Responses to If you earn a little extra money on the side, what qualifies as self-employment and what is simply a “hobby”?

  1. tro says:

    there is no minimum or maximum, if you perform services for someone else it is a business and reportable
    if your Sch C net is $400 or less you do not have to pay se tax on it
    apparently you do make something at this
    IRS takes the stand that when someone has a little side business but it never makes any money, they then consider it a hobby and disallow the expensesReferences :

  2. Mike W says:

    If your income doesn’t exceed your expenses, it’s a hobby. An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year.
    If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income.
    What are allowable hobby deductions under IRC 183?

    If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

    Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:

    Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
    Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
    Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.References : http://www.irs.gov/irs/article/0,,id=186056,00.html

  3. Obamavenger says:

    What is your motivation? Does the activity have a large personal enjoyment factor? If it is something that people regularly do for fun and you don’t really care about profit, then it is a hobby. If it is something that people ordinarily get paid for then it is very likely small scale self-employment.References :

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