If you work for yourself, either full-time or part-time, you must report your income and expenses on Schedule C. Self-employment income includes income from jobs that you do on the side, as well as any income reported to you on a Form 1099-MISC.
Because you’re self-employed, your ordinary and necessary business expenses are fully deductible on Schedule C. If you were an employee, you would only be allowed to deduct unreimbursed employee business expenses if you itemized deductions on Schedule A. In addition, your total miscellaneous itemized deductions (including your total of employee business expenses) would only be deductible to the extent they exceed 2% of your adjusted gross income.
As a self-employed individual, you obtain Social Security and Medicare coverage through the payment of self-employment tax. You must pay self-employment (SE) tax if your net earnings from self-employment are $400 or more. To learn more, see Self-Employment Tax.
If you carry on a business on the side, you should be aware of the hobby-loss rules. The IRS presumes that if you make a profit for 3 out of the last 5 years, you are engaged in an activity to make a profit. If this is the case, you can deduct losses from the activity against other income on your return. However, if an activity isn’t for profit, such as a hobby, you can only deduct expenses up to the amount of your hobby income. Expenses that exceed the income are nondeductible losses. To learn more, see Hobby Income.
The IRS considers the following factors when deciding whether your activity is a business or a hobby:
The manner in which you carry on the activity
The expertise of you and your advisor
The time and effort expended by you in carrying on the activity
Your expectation that assets used in the activity may appreciate in value
Your success in carrying on other similar or dissimilar activities
Your history of income or losses with respect to the activity
The amount of occasional profits, if any, you earned
Your financial status
Whether the activity has elements of personal pleasure or recreation.
For more information about business income and losses, see IRS Publication 334, Tax Guide for Small Business.