When does side income become a business?
Many people are surprised to learn they already have a business for tax purposes — even if they never formed an LLC or thought of themselves as “business owners.” The IRS uses a very broad definition of a business for tax purposes.
Understanding whether what you’re doing counts as a business can dramatically affect your taxes. It determines whether you can deduct expenses, whether you owe self-employment tax, and what strategies may be available to reduce your tax bill. Here’s how it actually works.
The IRS Definition of a Business
The IRS generally considers an activity a business if it is:
- Carried on with the intent to make a profit, and
- Conducted with continuity and regularity
If those conditions are met, the activity is typically reported as a business on Schedule C.
This definition is broader than most people realize.
If You’ve Been Paid for Services, You Already Have a Business
If someone (besides an employer) pays you for services you personally performed, that’s basically always considered a business for tax purposes.
This includes:
- 1099 jobs
- Independent contract work
- Freelancing
- Side gigs
- Consulting
- Gig economy work
Many people think of these as “just a job,” but if taxes were not withheld and you received a Form 1099 (not Form W-2), the IRS generally treats you as self-employed. Even if you didn’t receive a Form 1099, you still have a business and you’re self-employed, if you have the intent to make a profit and it wasn’t just a one-time isolated occurrence.
That means:
- The income goes on Schedule C
- You can deduct ordinary and necessary business expenses
- You must pay self-employment tax (Social Security and Medicare)
Self-employment tax alone is 15.3%, which surprises many first-time contractors. Plus there’s income tax. Since no one is withholding and paying in any of this tax to the government, like they would if you got a W-2, you will need to make your own estimated tax payments.
But there is a silver lining to being a business. The upside is that you can deduct legitimate business expenses that can reduce the taxable income significantly.
Common deductions may include:
- Equipment and supplies
- Mileage and vehicle expenses
- Professional software or subscriptions
- Home office expenses
- Cell phone service
- Continuing education
- Professional services (like accounting or legal help)
You also effectively get a special income tax rate on business income due to the Qualified Business Income Tax Deduction. This is law designed to help small business owners as part of the TCJA tax law effective in 2018.
Common Situations That Are Actually Businesses
Many people accidentally start a business without realizing it. Examples include:
- Driving for Uber, Lyft, DoorDash, or similar apps
- Freelance graphic design, programming, or writing
- Consulting in the same field as your regular job
- Selling items regularly on eBay, Facebook Marketplace, or Etsy
- Providing paid tutoring or lessons
- Lawn care, pressure washing, or home services
- Photography or videography side gigs
Even if the income is small or part-time, the IRS will usually treat these activities as a self-employed business.
Do You Need a Business License?
For income tax purposes, you do not need to form an LLC or register a business entity to have a business.
A sole proprietorship (the simplest form of business) exists automatically the moment you start operating a profit-motivated activity that you intend to continue. In the eyes of the IRS, this doesn’t require any paperwork.
The IRS doesn’t care whether you have a license or not. Business licenses or permits are paid to state or local governments.
Regularity Matters: Businesses vs Sporadic Income
Another key factor is whether the activity is continuous and regular. Now this certainly does not mean that you have to do the activity every week or spend 8 hours per day. Something that you only plan to do once, is not a business. Something you intend to keep doing whenever you have the chance would probably meet this test.
An activity that is occasional, irregular, or not organized in a businesslike way may be treated as an income-producing activity rather than a business. However, this is pretty rare. The most common example would be occasionally selling items that you own, like in a yard sale or on Facebook Marketplace. Most people do this sort of thing occasionally, on the other hand, some people sell items very regularly and are in the business of online sales. The IRS would also look at whether you bought the items with the intent of making money.
The IRS will look at all the factors including level of organization, effort, and intent to make a profit.
But I Can’t Possibly Have a Business!
This is a common feeling particularly if you’re only working for one company. It may be that the company paying you has misclassified you as an independent contractor when they should have classified you as an employee.
If you think this may be the case, you should look at the level of control the company has over your work, whether they provide the tools you need for the job or whether you’ve got unreimbursed expenses, and the nature of the relationship between you and the company.
If you think you should be classified as an employee, you can talk to us about it and address it with your employer if you think they should be paying their share of your Social Security & Medicare tax instead of you paying both parts of Social Security & Medicare as self-employment tax. In some cases, workers can file Form SS-8 with the IRS to request a determination of whether they should be treated as employees.
Being a Business Has Highs and Lows
For tax purposes, the definition of a business is much broader than most people think. If you’re regularly getting paid for services and trying to make money, the IRS will treat that activity as a business — whether you set one up intentionally or not.
That means two things.
First, you have responsibilities. You may owe self-employment tax, need to track income and expenses, and make estimated tax payments during the year.
Second, you also have opportunities. Real businesses get to deduct legitimate expenses and may qualify for tax benefits that employees don’t receive.
The key is understanding how the IRS views what you’re doing. Once you know that, you can structure things properly, keep the right records, and avoid unpleasant surprises when tax time comes around.