Is it neseccary to report a P & L on a 1040 if you are considered self employed?

Question

I have a normal W-2 job in which a generate enough income to live comfortably. I also have another job in which I also make a substantial amount of money, although, I'd like to consider this more of a hobby. Because of that, I decided to itemize on schedule A. I received a Notice of Deficiency for not reporting self employment tax. Is it to my understanding that I will now, more then likely, be audited for not filing with a schedule C? My "hobby" lets me not report on a certain figure of income if it does not meet the minimum requirement for reporting. There is no reporting sent to the IRS, therefore, there is no proof that I ever received these funday. Sadly, schedule C state's that ALL business income must be reported :\. Anyone care to clarify some things for me?

Answer 1

Yes, it is necessary to report your income and expenses on Form 1040 Schedule C if you are self-employed.



You are being audited for not filing a Schedule C. Your deficiency is the amount of social security and medicare tax the IRS figures you owe.



If your activity is a business, you are required to report your income and expenses on Schedule C, and to pay income tax, social security, and medicare tax on your net profit. If this is the case, prepare an amendment to figure the amount of tax, and then reply to the letter stating the amount you figure you owe. Be prepared to provide documentation of your expenses.



If your activity is a hobby, you are required to report your gross revenue on Line 21 of Form 1040. Your related expenses may be deducted on Schedule A, subject to a 2% of AGI floor and not to exceed your hobby revenue. If your current return is inaccurate, prepare an amendment for your hobby activity and reply to the letter. The burden of proof is on you that you have a hobby, not a business.



In either case, respond timely to the letter or your response may be disregarded.



See IRS Pub 535 for more details on how to determine if you have a hobby or a business. The main criteria for a hobby are that it is not carried out to make money, and you do not expect to make a profit.

Answer 2

Since you refer to this as a "hobby" then more than likely it's a business. The fact that you use it like a hobby is irrelevant.



The matter of hobby vs business typically comes up when a hobby shows a loss or shows a very small profit. The IRS requires you to report the income on Form 1040, line 21 and list any expenses on Schedule A as a 2% miscellaneous itemized deduction. A hobby can generate taxable income but never a tax loss. Hobby income is not subject to self-employment tax.



In your case it appears that the IRS position is that this is not a hobby but a business. All income and expenses go on Schedule C and you attach Schedule SE to calculate the self-employment tax. Since the IRS has decided that your substantial other income constitutes a business and not a hobby, they assessed the self-employment tax and sent the notice of deficiency.



You can try and make your case with the IRS that it is legitimately a hobby with no profit motive. Since you are making substantial income from this hobby the IRS won't likely agree with your position. If they IRS does not agree with your position, your next step would be to take the case to the Tax Court and plead your case there. You only have a limited amount of time after the notice of deficiency to take that tack, so get thee to a CPA or EA who specializes in self-employment income quickly. Once it becomes a statutory assessment your options will be severely limited.

Answer 3

You need to report it on your 1040 even if it is a hobby. You say you make a substantial amount of money from it but don't say how much. If you only make a couple hundred dollars from your hobby, IRS might go along with you and let you report it as a hobby. misc income. If you make thousands, by IRS definition, they'll call it a side business and expect it to be reported on schedule C, with se tax paid.

Answer 4

Wow. You made some assumptions.



The IRS bases the hobby/job distinction on a bunch of factors, but I bet you never read IRS publication 535's chapter on not-for-profit activities.



Let's say this *is* a hobby and you can satisfy the IRS that it is (which may require you to appeal to the tax court). DID YOU INCLUDE 100% of the money on line 21 of the 1040? Did you include the expenses (up to the amount of income) on schedule A in the 2% section (where they tend to evaporate)? Your statement



[My "hobby" lets me not report on a certain figure of income if it does not meet the minimum requirement for reporting.]



is just plain wrong.

Answer 5

you might consider it a hobby but if there is a profit motive in the operation and you actually make a profit, it is a business

you report this on Sch C, and it will include the items on your PandL

if the net amount is more than $400 you will also use Sch SE to calculate your se tax

this also considers your regular job but unless you have already reached the maximum for SS in that job you will owe se on this so called hobby

Answer 6

If you reported the income as miscellaneous income then you should have responded to IRS that you did it that way. It sounds like the same income is being counted twice by IRS.

Answer 7

LOL! Your "hobby" must be reported once you make more than $1. That nothing is sent to the IRS just means that you have a better opportunity to commit tax fraud.

Answer 8

did you open a business checking acct? the IRS must have had some idea from somewhere that you were in business

Answer 9

no its not.