Did you have income this year that wasn't earned as part of your regular job? Determining how to report unusual income on your income tax forms can be complicated. For many people, this includes deciding whether this income is reported as self-employment income or other income (Form 1040, Line 8). While it may not sound like a big deal, it could mean hundreds or thousands of dollars in taxes.
How can you tell the difference and avoid both unnecessary taxes and potential red flags? Here are three key factors to determining whether you were self-employed or not.
Self-employment is something a taxpayer engages in on a regular or semi-regular basis. Even a part-time business is done in a recurring manner, although the person doesn't engage in it every day, every week, or even every month. If you deliver food on weekends, you're just as regular as the person who delivers food only when they need extra cash for an event. It's an activity you intend to do again and again.
2. Intent to Profit
Did you engage in the activity with the goal of earning a profit? Then you likely are self-employed.
This question can be misleading, though. It doesn't necessarily mean you must actually see a profit nor does it mean you can't make a profit and not be self-employed. An entrepreneur might start a side business making and selling crafts. But many small businesses don't actually turn a profit for a year or more. However, they are still engaged in an activity with the goal of making money.
On the other hand, something defined as other income might result in a profit without being an actual business. A person who participates in a research study might receive money for their participation. However, if they are motivated to participate in order to further the research, they aren't engaging in a business.
3. Passivity or Activity
What did you do to receive the unusual income? Passive activities are more likely to be termed other income than active participation. A person who leases a portion of their land in a one-time arrangement or who received a lump sum from surrendering a whole life insurance policy got passive income rather than working actively to earn it. However, a craftsman investigating the potential for starting a later business actively worked to earn that income.
Where to Learn More
The decision between reporting income as self-employment versus other income is more important than it may seem. And some sources of income are complex to decipher for tax purposes. The best place to begin is to consult with an experienced tax preparer in your state. Make an appointment today to learn more about the tax services that are available to you.