Are You Doing a Hobby/Side Hustle or Running a Business?
Since the rise of e-commerce, online sales have offered a great way for people to earn extra income. Whether you’re creating handmade items, selling digital products, offering consulting or coaching services, or engaging in any other online sales, it’s been a convenient way to make money. Previously, this extra income was often seen as non-taxable, similar to holding a yard sale at your home. However, this is no longer the case.
The IRS has introduced changes to the reporting requirements for online sales, which have significant implications for sellers. Originally, the threshold for reporting payments on Form 1099-K was set to drop from $20,000 and 200 transactions to $600 with no transaction minimum. However, this change has been delayed multiple times. For the 2023 tax year, the threshold remains at $20,000 and 200 transactions. Starting January 1, 2024, the threshold will be $5,000, as part of a phased approach to eventually implement the $600 threshold by 2025 (IRS.gov) (IRS.gov) (KPMG).
What does this mean for you if you’re just trying to make a little extra money? It means you must now claim this income on your tax returns, even if it’s from a side hustle. If you earn over $5,000 in 2024, you will receive a 1099-K form from the payment processor you use, such as PayPal, Venmo, or Etsy.
As a bookkeeper and business consultant, I can help you navigate these changes and think critically about your online presence. Do you want this to be a business or just a side hustle? Here are a few key considerations:
- Record Keeping: Whether it’s a hobby or a business, keeping detailed records of your transactions, expenses, and income is crucial. This will help you accurately report your earnings and claim any deductions you might be eligible for.
- Tax Identification Number (TIN): Ensure your payment platform has your correct TIN (SSN, EIN, or ITIN) to avoid issues with IRS reporting requirements. Inaccurate information can lead to backup withholding and other complications (TaxAct Blog).
- Determining Business vs. Hobby: If your activities are for-profit and conducted regularly, the IRS may classify them as a business. This could allow you to deduct business expenses, but also means you’ll need to comply with more stringent tax reporting requirements.
If you need guidance on whether your online sales should be considered a business or a hobby, and how to best manage your bookkeeping and tax obligations, feel free to reach out to me for more information: Cheryl@BlueGraniteBookkeeping.com
By keeping accurate records and understanding the reporting thresholds, you can avoid surprises during tax season and ensure you’re compliant with the new regulations.
