In today’s world it is not uncommon to have a side gig. With rents increasing and the cost of living skyrocketing many people do things on the side or work two jobs just to survive. If you live in an expensive, urban area like San Francisco, NYC or Los Angeles you know what I mean.  

The big question is whether your side gig is a business or a hobby. It’s important to know this because the IRS treats money made from a hobby differently from money earned in a business activity.

If you regularly and consistently run a business, even one that is very small, you are entitled to deduct all the expenses that are ordinary and necessary to operate it. You will also be responsibility for paying self-employment tax on your net income. Income from a hobby on the other hand is not subject to self-employment tax but the related expenses are not deductible.

Typical Business Success Rate

It’s no secret that business is hard. According to the Small Business Administration about 50% of new businesses fail within 5 years. Not everyone has the ability to choose the right industry or make the commitment required to weather the storms that a business owner will face.

Money, or lack of it, is another issue most people face when starting an enterprise. You could carry on an activity for years and make very little or no money at all. However, that doesn’t necessarily mean that it’s not a business. If you attempt to make a profit, maintaining receipts and financial records you could make a case for running a business.

For federal tax purposes the IRS looks at the following factors in determining if your endeavor is a hobby or a business:

  1. How much time you commit to the activity
  2. The way in which you perform the work and present yourself
  3. The knowledge of the taxpayer
  4. How successful he or she was in the same or different work
  5. The profit earned in the activity
  6. The likelihood assets used in the work will increase in worth
  7. The overall financial standing of the taxpayer
  8. If the activity could be done for recreation and enjoyment
  9. How steadily profits can be expected

The facts and circumstances are considered and no one individual or group of factors is used to make a determination.

From a tax standpoint you are better off running your side gig like a business instead of a hobby. Now that you’re aware of what the IRS looks for you can make any necessary changes to take full advantage of the deductions available to you.