Side Hustles & Taxes: What Counts as a Business (And Why It Matters)

There's absolutely nothing wrong with having a side business; they are meant to diversify your income streams and serve as a good fallback plan between career moves. In today’s gig economy, side hustles are more popular than ever—whether it's mowing lawns, building websites, or doing photography on weekends; freelance work is an excellent way to earn extra income.

But here’s something to consider: once you start earning money outside your regular job, the IRS treats that income differently. Knowing a few business tax basics can help you avoid surprises in April and might even unlock tax benefits if your hustle qualifies as a “real business.”

Hobby or Business? The IRS Looks for Intent

The IRS needs to decide if your activity is a hobby or a business because the rules differ, especially regarding deductions and income reporting. When you earn money from something you enjoy, the IRS looks for proof that you genuinely plan to run it as a business.

A few examples include:

• Operating in a businesslike way, with records and bookkeeping

• Putting in consistent effort to turn a profit

• Relying on the income to support your lifestyle

• Adjusting your approach if you’re not making money (IRS.gov)

Typically, if a side hustle or hobby makes a profit in three out of five years, it is more likely to be classified as a business.

Deductions: What You Can (and Can't) Write Off

A qualified business allows ordinary and necessary expenses to be deductible. Examples include:

• Mileage or transportation costs for business purposes

• Equipment used regularly and exclusively for your work

• Home office expenses, if you meet the IRS criteria

• Software, subscriptions, website hosting, and advertising

The key is that expenses must be clearly linked to your business, not personal spending disguised as business activity, and must be thoroughly documented.

Getting Set Up the Right Way

Running a side hustle doesn’t require a storefront or a large investment, but you should take it seriously if you want the tax benefits. To legitimize a business, you might:

• Open a separate business bank account

• Keep receipts and organized records

• Build a simple business plan

• Obtain required licenses or permits

• Register for state or local tax requirements if applicable

A legal or tax professional can help you check off these and many other boxes, especially if you expect to owe taxes; you might need to make quarterly estimated payments, which many new entrepreneurs find surprising.

A Basic, Real-Life Example

Imagine earning $4,000 this year by freelancing as an online content creator.

• Since it’s self-employment income, it needs to be reported.

• If your gigs are considered legitimate business activities, you can deduct relevant expenses such as equipment, software, subscriptions, and other costs (but consult your tax professional).

• Potential deductions might lower your taxable income and reduce your tax bill.

Here’s the catch: if your gigs are considered a hobby, you still need to report the income, but you can't deduct expenses.

Key Takeaway

Side hustles are great—they offer flexibility, a chance for extra income, and a way to break up the weekly routine. However, they also bring tax responsibilities. Treat your side gigs like a real business by keeping accurate records and understanding what the IRS requires. This can help you maximize legitimate tax benefits and prevent surprises. Remember, a qualified tax professional can give guidance tailored to your specific situation.

Disclaimer: Creek & Lyells Financial Literacy Foundation does not provide financial services, nor does it recommend or advise visitors to open accounts or buy or sell securities. All content on this blog is for educational purposes only. While we strive to provide accurate, relevant, and well-vetted information, visitors should consult a licensed financial professional and carefully evaluate the risks of any financial decision before taking action.