Do you have a hobby that has become a source of income? If so, you’ll need to report that income on your tax return. According to the IRS, a hobby that generates income should be considered a business unless it does not make a profit for more than three to five years, or you had no intention of making a profit with it.
If you’re unsure whether your hobby activity counts as a business, consider these questions:
- Are you carrying the activity out in a businesslike manner and are you maintaining complete records?
- Are you putting effort into making it profitable?
- Do you depend on the income you make from it?
- Have you tried something similar in the past and had success at making a profit?
- Are you making a decent amount of money with this hobby?
If you answered yes to any of these questions, then you must set up a business. If you answered no to any, while you do not need to set up a business, you must still show your income. This must be reported on Schedule 1, line 8 of Form 1040. Hobby activity income is not subject to self-employment tax.
If you find that you are in a position where you must set up a business, contact us today. Here at Ryder & Company, we can help you determine what the best business entity is for you and make sure your business is properly registered and set up for success.
Ryder & Company is located in West Lawn, PA and offers a variety of accounting services, part-time CFO services, payroll preparation, and much more! We also offer tax preparation for individuals, as well as businesses and nonprofit entities. We assist many individuals and businesses in and around Wyomissing, Exeter, and Reading.