OnlyFans, YouTube, Instagram, or TikTok: When your online hobby becomes a business, everything changes for your income taxes. Our guide can help make sense of it all.
I write about money. I’ve been reviewing tax software and services as a freelancer for PCMag since 1993. Along the way, I took on reviews of other types of business and personal finance technology. Prior to that, I had spent a few years writing about productivity and entertainment applications for 8-bit personal computers (my first one was a Commodore VIC-20) as a member of the editorial staff at Compute!
The internet—and specifically, social media—opened up a whole new world of money-making ventures, and millions of people have climbed on board. The COVID-19 pandemic accelerated that movement. Whether by choice or necessity, millions more joined the ranks of individuals chasing income—and sometimes, fulfillment—during their off hours.
The entrepreneurs who have embraced these side hustles, and sometimes parlayed them into full-time businesses, are everywhere. Instead simply translating an office job into a private gig—accountants working from home as tax preparers, for example—people are just as likely to have a full-time job in one field and take on side gigs doing something totally unrelated. A plumber might make YouTube videos of his stand-up comedy. A retail worker may want to model and so builds her reputation as a fashion influencer on Instagram. A workout instructor might also build a base of OnlyFans subscribers.
These influencers all have three things in common. They have to pay income taxes on those on-the-side dollars. They need to know what a legitimate business expense is to offset that income. And a lot of them don’t know how.
You probably didn’t think about taxes when you took on your new venture. You just wanted to see if you could make a little money doing something you love and have a flexible schedule doing it. But now that tax prep time is rolling around, you have a list of income and expenses, a Schedule C, and a lot of questions.
The tricky thing is you won’t know whether the business expenses you claim are acceptable to the IRS unless you get audited and have to produce receipts. All the IRS wants on your 1040 and related forms and schedules are numeric totals.
Hang on to your expense documentation for three years after a filing date—longer if there are any irregularities, such as understated income, overstated property values, or a bad debt deduction.
Keep in mind, too, that any freebies you get from vendors, like cosmetics and hair products for a brand influencer or power tools for a woodworking YouTuber, are expected to show up on your tax return as income.
The IRS doesn’t want a Schedule C from you unless you’re actually operating a business, not just indulging a hobby. “A business operates to make a profit,” says Barbara K. Blacklidge, an Enrolled Agent (EA) who spent 16 years as a tax preparer for H&R Block. “People engage in a hobby for sport or recreation, not to make a profit.”
The IRS also looks at your track record over time. If you realize a profit in at least three out of five consecutive years, the agency will presume that you are engaged in it for profit, and your returns shouldn’t throw up any red flags, depending on the expenses you’re claiming.
If you still think the lines are blurred after considering your tax status, you can consult the IRS’s nine questions to consider(Opens in a new window). It may give you a better idea of the agency’s view of the difference between a business and a hobby.
Blacklidge has been a Tax Expert for JustAnswer(Opens in a new window) for the last ten years. JustAnswer is a platform that connects people with doctors, tax accountants, lawyers, vets, mechanics, and other verified and vetted experts for real-time assistance 24/7. The site has 12,000 experts that cover 700 categories.
In 2021, the site’s experts received almost 100,000 questions on taxes alone, and they’ve already gotten almost 7,000 questions in 2022. The Child Tax Credit, self-employment income, home office deduction, and cryptocurrency are some of the current trending topics. To get this expert help, you have to pay around $30–$70 per month, depending on the level of expertise required. The tax and finance category is $50 per month for unlimited questions. You can cancel anytime.
So how do you determine whether you can claim an expense as a legitimate business deduction, especially if you have expenses that don’t fit neatly into Schedule C categories?
“The general rule is that any expense which is ordinary and necessary for the business is deductible,” says Blacklidge. “An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.” Even those descriptions leave room for interpretation.
If you have items that are used for both business and personal purposes, only that portion of the expense used for business is deductible. For example, if you use video equipment for your business and also use the same setup for personal pursuits (making videos of family events such as birthdays and holidays, for example), only that portion of the expense attributable to business use is deductible. Determining the percentage of time you use an item or service for personal versus business use might take a good faith estimate rather than an exact calculation.
As to clothing and makeup for video shoots, the basic rule is that if you can wear the clothing and makeup outside of the video shoot, it is not deductible as a business expense. If you wear a swimsuit for a TikTok video but also wear it to play beach volleyball during your off hours, you can’t deduct it.
On the other hand, a clown costume with theatrical face makeup would be deductible as a business expense, says Blacklidge… if you make at least part of your living as a clown, that is.
For the 70 million freelancers in the US, the question of which business expenses will be accepted by the IRS is “a severe pain point in the entire community,” says Jaideep Singh, CEO of tax app provider FlyFin(Opens in a new window). That self-employed community, he says, is expected to grow to 86.5 million in the next five years. By 2027, freelancing will comprise approximately 51 percent of the total US workforce.
“Content creators, Uber drivers—they all keep Googling [their questions] and still aren’t really sure,” he says.
FlyFin, available for Android and iOS mobile devices, is a unique app that helps categorize business expenses for you. You connect all your accounts that contain expenses by providing your username and password for the related bank login and import transactions. It’s similar to how the personal finance app Mint works. (FlyFin uses Plaid, a leading third-party account aggregator.) FlyFin then uses artificial intelligence to assign Schedule C categories to each transaction. If it misses some or makes mistakes, you can correct them.
Expenses come on the screen one by one. You swipe right to accept it as a business deduction, left to classify it as non-business (that is, reject it), down to review it later, and up to ask a question of one of FlyFin’s CPAs. You can split transactions between business and non-business and view transactions as lists that can be searched, sorted, and filtered. If you’re ever audited, you have your digital receipts stored in the app.
FlyFin offers a seven-day free trial, though a credit or debit card is required. The Basic version ($84 per year) is designed for taxpayers with roughly $60,000 net annual income. It includes AI deduction tracking and limited CPA advice. Standard ($192 per year) is good for up to $120,000 net income and adds federal and state tax preparation done by a CPA, and audit assistance. Premium ($348 per year) is good for up to $218,000 net annual income and includes everything mentioned so far plus a designated CPA, and support for multiple additional tax entities, like one- or two-person LLCs and S-corps.
The AI, automation, and support FlyFin offers would be especially appropriate for culture creators and other self-employed individuals who need an easy-to-use and reliable digital space where they can store their deductible and non-deductible expenses, and get advice from experts on the legitimacy of specific expenses.
It’s an effective combination. “Machines are great at grunt stuff,” says Singh. “Human intelligence is a different thing.”
The 2021 tax year is FlyFin’s first. If you’d rather get tax preparation help from providers who have been at it for years or even decades, you might use one of the best tax preparation software applications, some of which are designed specifically for self-employed individuals. They come from well-known companies like H&R Block and Intuit, which owns TurboTax.
Some offer the option to connect with an accounting professional via phone, chat, or screen share for an extra fee after they’ve “matched” you based on your financial issues. You can also upload your tax documents to a pro and have them prepare and file your entire return.
Even if you’re not making much money through your side hustle, it doesn’t mean you won’t ever get audited and have to haul out your expense documentation for an IRS auditor.
“Content creators, as well as other non-traditional self-employed workers, are often highly scrutinized,” says Brett Johnson, CPA and Vertical Account Manager at Xero. Johnson and his wife Logan, who is a special education teacher, had developed a social media following as they helped people grow their passions into sustainable, thriving brands. What began as their own “passion project” eventually morphed into a Schedule C venture, a side business called Passion 2 Brand(Opens in a new window).
Some entrepreneurs may be more comfortable thinking of their Instagram talk show or Facebook fashion tips as a side gig or hustle. But when it comes to taxes, not treating the work seriously puts them in danger of declaring losses for too many years in a row. “It’s key to treat these professions, despite how flexible or non-traditional they may be, like real businesses,” says Johnson.
Much of what gets reported on a Schedule C involves the same types of expenses whether you’re a high-priced attorney or a college student dancing on TikTok. Self-employed individuals may, for example, pay rent and utilities for the spaces where they work. They might have travel and meal expenses, advertising, and office supplies to claim.
“If someone is a lifestyle or travel blogger, you would be able to claim normal operating expenses,” says Johnson. “What becomes tricky is that depending on the type of video equipment you buy, the expense could be considered a business deduction or a fixed asset.” A lot of Schedule C businesses have immense gray areas,” he says.
Not surprisingly, Johnson thinks that self-employed people should consult an accounting professional. “As soon as you start making money and filing a Schedule C, you should be working with a CPA,” he says.
Johnson believes that many self-employed individuals opt for DIY tax preparation software because it seems intuitive and basic on the surface. “However, it’s important to understand that intuitive and basic are not very good qualities when it comes to taxes,” he says.
JustAnswer’s Blacklidge looks at it similarly. “Having a tax professional is not required,” she says. “But unless the individual can take the time to research and implement the tax rules when preparing their own return, it is always a wiser choice to use a tax professional.”
Worried that the way you make money may not be acceptable to the IRS? There are many nontraditional occupations that are legitimate businesses and should follow the same rules everyone else does about reporting income and expenses. Failing to do so can result in penalties for tax evasion.
Take sex workers, for example. How do they file? Just like any other self-employed individual. They have business expenses like advertising, office equipment, and insurance.
They file a 1040, of course, and a Schedule C, plus form 8829 if they’re claiming expenses for business use of a home. Schedule C has a few categories where expenses specific to the sex trade could be included, like office equipment, supplies, and other expenses. They might use a generic business code like “all other personal services,” unless they’re doing work like consulting or modeling.
In her book, “The Tax Domme’s Guide for Sex Workers and All Other Business People,” author, tax professional, and former sex worker Lori St. Kitts discusses basic tax topics, like business expenses, what to expect in an audit, and office and file organization.
St. Kitts doesn’t believe that sex workers are any more hesitant to file taxes than any other self-employed person. “Sex workers are often very much interested in filing and paying their taxes,” she says. “They want to show the positive income flow that their successful businesses create so that they may rent an apartment, get a mortgage, a car, or a loan to grow their business.”
Many items specific to the sex trade can be deducted. St. Kitts lists expenses like props, club and stage mom fees, limited wardrobe items and makeup, condoms and lube (porn actors and producers only), and, as she told Reuters(Opens in a new window), an ankle restraint in a dominatrix’s dungeon.
David—who has asked that we only use his first name—has been a professional tax preparer for 35 years and owns a large accounting firm. He also runs the site Sex Worker Taxes(Opens in a new window), which provides tax resources to individuals in the adult entertainment industry.
Ten years ago, an exotic dancer came into his office wearing only a trench coat and wanted to get her taxes done. She had cash to buy a new home, but no lender would work with her because she didn’t have tax returns to show. Today, 20% of his business comes from sex workers.
He provides specific guidelines for those clients. “You don’t want to put ‘sex worker’ on your return,” he says. “This is a specialized industry, and one must be careful what is classified as an expense.”
David often hears the question, “Why should I file my taxes?” Besides the fact that the law says any income over $400 must be reported, David tells people that if they ever want to buy property, the lender will want to see at least three years’ of tax filings. Plus, when you pay self-employment tax, that money goes into your Social Security account for retirement.
There’s also form 1099-K, an IRS form that goes out to both you and the IRS if your business gets paid more than $600 in a tax year (reduced from the previous $20,000 for tax year 2020) by third-party service like PayPal or the banks that issue your credit and debit cards. If you don’t file taxes and include the 1099-K income, the IRS will send you what’s affectionately referred to by tax preparers as a “love letter,” asking why you didn’t file.
St. Kitts has seen an attitude shift since she started preparing tax returns for sex workers in 2005. Many tax preparers were afraid to take on clients in the adult entertainment industry, especially those with illegal income.
Unlike those earlier days, “the sex worker industry is accepted more and is a viable income source for new entrepreneurs looking for something different,” she says.
Some tax experts say that accounting is more art than science. To be clear, the IRS has rules, and it expects you to follow them or face penalties. As long as you don’t have to deal with complex topics like depreciation or cryptocurrency transactions or the home office deduction, following the IRS’s directives just takes some study and attention to detail, and some common sense.
Now that everyone and their dog (yes, you could claim your canine’s business income and expenses if they become a social media influencer) is turning passion into profit, new entrepreneurs have to think like businesspeople for part of their workdays. And tax experts are finding that the questions that come their way are a little more intriguing (dare we say, fun?) than they used to be.
Sign up for Tips & Tricks newsletter for expert advice to get the most out of your technology.
This newsletter may contain advertising, deals, or affiliate links. Subscribing to a newsletter indicates your consent to our Terms of Use and Privacy Policy. You may unsubscribe from the newsletters at any time.
Your subscription has been confirmed. Keep an eye on your inbox!
Advertisement
I write about money. I’ve been reviewing tax software and services as a freelancer for PCMag since 1993. Along the way, I took on reviews of other types of business and personal finance technology. Prior to that, I had spent a few years writing about productivity and entertainment applications for 8-bit personal computers (my first one was a Commodore VIC-20) as a member of the editorial staff at Compute!
After working at Lawson Associates, now Lawson Software, I switched my focus to accounting but learned that personal computer applications were more progressive and interesting to cover than mainframe solutions. So I served as editor of a monthly newsletter that provided support for accountants who were just starting to use PCs. I still ghostwrite monthly how-to columns for accounting professionals. From there, I went on to write articles and reviews for numerous business and financial publications, including Barron’s and Kiplinger’s Personal Finance Magazine.
Read Kathy’s full bio
Advertisement
PCMag.com is a leading authority on technology, delivering lab-based, independent reviews of the latest products and services. Our expert industry analysis and practical solutions help you make better buying decisions and get more from technology.
PCMag supports Group Black and its mission to increase greater diversity in media voices and media ownerships.
© 1996-2022 Ziff Davis, LLC., a Ziff Davis company. All Rights Reserved.
PCMag, PCMag.com and PC Magazine are among the federally registered trademarks of Ziff Davis and may not be used by third parties without explicit permission. The display of third-party trademarks and trade names on this site does not necessarily indicate any affiliation or the endorsement of PCMag. If you click an affiliate link and buy a product or service, we may be paid a fee by that merchant.