When it comes to filing taxes, hobbies and businesses are treated differently. The main difference is that a business operates with the purpose of making a profit, while a hobby is pursued for pleasure or recreation.

However, if you receive payments for goods or services through apps during the year, you may receive a Form 1099-K from the IRS for those transactions. These payments constitute taxable income and must be included on your federal tax return, regardless of whether the activity is considered a business or a hobby.

How can you tell if your activity is a business or a hobby?

The IRS recommends analyzing several factors before deciding how to classify your activity. No single factor is decisive on its own.Instead, all factors must be considered together to make a well-informed decision.

Below are some key questions that may help you:

• Do you intend to make a profit?
• If it has generated profits, how much has it been?
• Can you expect to earn future profits through the revaluation of the assets used in the business?
• Do you depend on that income for your livelihood?
• Are the losses incurred due to circumstances beyond your control, or are they normal in the initial phase of your type of activity?
• Have you made adjustments to your operations in order to improve profitability?
• Do you keep complete and accurate records and accounting books, as a business would?
• Do you (or your advisors) have the necessary knowledge to operate this activity as a successful business?

Answering these questions will help you determine if your activity should be considered a business for tax purposes.

Keep good records all year round

Whether your activity is a hobby or a business, it's essential to maintain good records throughout the year. Organized accounting will not only make filing your tax return easier, but it will also be key to justifying the correct tax treatment to the IRS.