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 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, the total of employee business expenses must exceed 2% of your adjusted gross income to be deductible.
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 more than $400. To learn more, see Self-Employment Tax.
If you carry on a business on the side, such as selling crafts that you make or photographing special events, you should be aware of the hobby-loss rules. The IRS presumes that if you make a profit for three out of the last five 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:
How much time and effort do you put into the activity?
Do you depend on its income?
Are losses due to circumstances beyond your control, or did they occur in the start-up phase of the business?
Did you change your methods of operation to improve profitability?
Do you or your advisors have the knowledge needed to carry on a successful business?
Have you made a profit in similar activities in the past?
Have you made a profit in some years?
Do you expect to make a profit in the future from the appreciation of assets?
For more information about business income and losses, see IRS Publication 334, Tax Guide for Small Business.