IRS Tax Tip: Hobby or Business – What Massachusetts Residents Need to Know If They Have a Side Hustle

by | Jun 19, 2024 | Taxes |

Hobbies and businesses are treated differently when it comes to filing taxes. The biggest difference between the two is that businesses operate to make a profit while hobbies are for pleasure or recreation.

Whether someone is having fun with a hobby or running a business, if they are paid through payment apps for goods and services during the year, they may receive an IRS Form 1099-K for those transactions. These payments are taxable income and must be reported on federal tax returns.

There are a few other things people should consider when deciding whether their project is a hobby or business. No single thing is the deciding factor. Taxpayers should review all the factors to make a good decision.

How taxpayers can decide if it’s a hobby or business

These questions can help taxpayers decide whether they have a hobby or business:

  • Does the time and effort they put into the activity show they intend to make a profit?
  • Does the activity make a profit in some years, and if so, how much profit does it make?
  • Can they expect to make a future profit from the appreciation of the assets used in the activity?
  • Do they depend on income from the activity for their livelihood?
  • Are any losses due to circumstances beyond their control or are the losses normal for the startup phase of their type of business?
  • Do they change their methods of operation to improve profitability?
  • Do they carry out the activity in a businesslike manner and keep complete and accurate books and records?
  • Do the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business?

Whether taxpayers have a hobby or run a business, good recordkeeping throughout the year will help when they file taxes.

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