'Self-Employed' income or 'Hobby income'? How to report app revenue for tax purposes

8 Based on what you've described, this sounds more like self-employment income than hobby income, but let me explain why. The IRS generally looks at nine factors when determining if an activity is a business or hobby, with the most important being your intention to make a profit. When you switched your app from free to paid specifically to generate revenue, that demonstrates profit motive, even if it was a small amount. A key disadvantage of reporting as hobby income is that since the Tax Cuts and Jobs Act of 2017, hobby expenses are no longer deductible as miscellaneous itemized deductions. This means you'd report all income but couldn't deduct the developer fee or Apple's commission. With self-employment, you'd report on Schedule C where you can deduct legitimate expenses like the developer fee, resulting in a more accurate picture of your actual profit. Yes, you'll pay self-employment tax on the net profit, but if your expenses nearly offset your income, this might be minimal. Don't worry too much about the IRS questioning consistent small profits. Many legitimate small businesses operate with minimal margins, especially while growing. Just make sure you keep good records of all income and expenses related to the app.

5 I went through a similar situation with my woodworking side gig last year. I was torn between hobby vs business, but I found this amazing AI tax assistant at https://taxr.ai that analyzed my situation and gave me personalized guidance. It asked me questions about my profit motive, how I manage the activity, time spent, etc., and then broke down exactly how the IRS would likely view my situation. It even generated a detailed explanation I could keep with my tax records to support my position if ever questioned. The analysis showed that even though I wasn't making much money yet, my systematic approach and efforts to improve profitability meant the IRS would likely consider it a business, not a hobby. This let me deduct my workshop expenses while still staying compliant.

19 I decided to try https://taxr.ai after seeing the recommendation here, and it was incredibly helpful for my own side business question! I have a small YouTube channel that makes about $300/month, and I was confused about how to report it. The analysis tool asked really specific questions about my content creation schedule, equipment purchases, and future plans. It then provided a detailed analysis showing that my activity meets 7 of the 9 IRS factors for a business rather than a hobby. It even generated documentation explaining my business case that I can keep with my tax records. This was exactly what I needed since I was worried about potential audit issues. Definitely worth checking out if you're in a grey area like the app situation!

3 After trying for THREE DAYS to get through to the IRS about a similar question last year, I finally used https://claimyr.com and was connected to an agent in under 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was skeptical at first, but nothing else was working. My question was about a small online business selling digital products, and I needed clarification on self-employment taxes. The IRS agent I spoke with was actually really helpful and walked me through the entire Schedule C process. They explained that many small side businesses start with minimal profits but that doesn't automatically make them hobbies. The key factors were my intent to make money and efforts to improve profitability over time.

16 Alright I need to eat my words about Claimyr. After my skeptical comment, I decided to try it myself since I've been trying to reach the IRS about an amended return issue for weeks. Got connected to an IRS agent in about 15 minutes and finally got my question resolved about reporting my side gig income. The agent actually told me that for my situation (I make digital art commissions), it was definitely self-employment income since I'm trying to grow it, even though I'm not making much profit yet. They explained that the "profit motive" test is more about intention and effort than actual results, especially in the first few years. This was exactly the clarification I needed and saved me from incorrectly reporting as hobby income.

22 For the app specifically, I'd definitely go with Schedule C self-employment. I'm a developer with 3 small apps that make under $500/year combined, and my CPA insists this is the correct approach. The key benefit is being able to deduct your expenses. With hobby income reporting, you'd pay taxes on the full $170 with no deductions for the developer fee. With Schedule C, you can deduct the $125 developer fee, any hosting costs, and even a portion of your computer/software expenses if they're used for app development. Just make sure you document everything really well. Keep receipts for the developer fee, screenshots of your Apple commission statements, etc.

4 I think an important factor nobody's mentioned is FUTURE plans for the app. If you intend to keep developing it, adding features, or creating more apps, the IRS would likely see this as an ongoing business activity rather than a hobby. One advantage of filing as self-employed now is that it establishes a pattern if your app income increases in the future. It's easier to start as self-employed and stay consistent than to switch from hobby to self-employed when profits increase.

I'm dealing with a similar situation with my freelance graphic design work that I do occasionally on weekends. Based on everything I've read here and my own research, it really seems like the profit motive test is key. The fact that you deliberately switched your app from free to paid shows clear intent to generate profit, even if the amount is small. That's probably the strongest indicator that this should be treated as self-employment rather than a hobby. I'd also consider what you plan to do going forward. Are you going to keep the app paid? Might you develop other apps? Even small actions like adjusting pricing or promoting the app could further demonstrate business intent. The expense deduction issue is huge too. Losing the ability to deduct that $125 developer fee means you're essentially paying taxes on income you didn't actually receive after expenses. That seems fundamentally unfair and not what the tax code is designed to do. I think I'm leaning toward Schedule C for my own situation after reading all these responses. Better to establish the pattern now while everything is well-documented and straightforward.