Before Paying Your Taxes, Understand the Difference Between Hobbies and Side Hustle
How much is your side fuss bringing in now? How much do you think he will make this year based on your first quarter earnings?
(I’ll wait while you do the math.)
The next question is, how much do you spend on the side hustle and bustle? Is it more or less than what you earn?
Gross income is large, but new tax laws have tightened the question of whether you can deduct the expenses you accumulate when you do side work. This means that if your side work isn’t helping your bottom line, you may have to classify it as a hobby and lose potential tax savings.
The basic rules of business versus hobby remain the same: to qualify as a business, you need to make a profit within three of the past five years. To quote IRS Publication 535 :
An activity is presumed to be profitable if it has generated profit in at least 3 of the last 5 tax years, including the current year.
(There is an exception for people who breed, show, train, or run racehorses – they should only show a profit in two of the last seven years, probably because horses are expensive.)
If your side job qualifies as a business, you will list your income and expenses in Table C and can deduct the related business expenses from your taxes. This also remains unchanged.
However, in the past, taxpayers were able to list and deduct certain hobby expenses from their taxes, even if their desire to make money was not considered a formal small business. As reported by The Washington Post , new tax laws have removed this deduction:
“In the past, you could claim hobby spending as part of various detailed deductions that were required to exceed 2 percent of adjusted gross income,” said [IRS spokesman Eric Smith]. “But this category of deductions has been canceled as part of the tax reform.”
In the past, you could deduct expenses from a hobby to the income it generated as personal itemized deductions if you hit the 2 percent threshold. However, from 2018 until 2025, this deduction is no longer allowed.
What does this mean for you? If you have more expenses than income and have not made a profit for three years out of the last five, you will have to classify it as a hobby.
If you are starting a side hustle and it has yet to make a profit – but you think it could make a profit in three of the next five years – you can fill out IRS Form 5213 , Election to Deferral Determination of Whether the Presumption suggests that activity is underway for the purpose of making a profit “.
(If you’ve read all of this and feel more confused than when you started, you can always hire an accountant or tax preparer to help you.)
Most importantly, if your side job isn’t generating any profit, you can start cutting back on business expenses or working to increase your income. Do it for the profit of your business – or your own profit, because the money you spend on a losing business is likely to come out of your own pocket – and do it for your tax return.
Or you can always agree that your “side hustle” is actually a “side hobby.” After all, not every hobby needs to turn into a full-fledged business.