'Self-Employed' income or 'Hobby income'? Need guidance on tax filing for app income
Title: 'Self-Employed' income or 'Hobby income'? Need guidance on tax filing for app income 1 Hi everyone, I work full-time as a software developer and need some tax advice about a small side project. Around 5-6 years ago, I created an app and published it on the App Store for free. I've been paying the $125 Apple developer fee annually just to keep it available. Last year (2024), I decided to make it a paid app to see if I could generate some revenue or at least offset that annual developer fee. The app made about $225 in sales, but after Apple took their cut, I received roughly $160. Now I'm trying to figure out how to report this on my taxes, and I'm confused about whether to declare it as "hobby income" or "self-employed income." I personally view this as a hobby side-hustle. I'm not depending on this money at all, and I mainly just wanted to see if I could cover that Apple developer fee. But I've gotten conflicting advice from several tax professionals. Some say I should file it as "self-employed" income because: - When I made it a paid app, my intention was to generate profit - If I keep calling it a "hobby" for multiple years, the IRS might eventually decide it's actually self-employment - As hobby income, I can't deduct expenses like the developer fee or Apple's commission Others suggest "hobby income" because: - This isn't really a business and dealing with Schedule C for self-employment can be complicated - If I report self-employment and claim deductions like the $125 fee and Apple's commission, my taxable profits would be minimal, which might raise IRS flags after a few years When I changed the app from free to paid, I was curious about potential earnings, but I never planned to invest significant time to make it profitable. If it didn't generate much income, I'd be fine with that. At most, I might adjust the app price, but that's about it. I'm really lost on which option makes more sense. Any advice would be greatly appreciated!
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Danielle Mays
12 This is actually a common confusion among folks with small side projects. The IRS has specific criteria for determining whether an activity is a hobby or a business, and it's not just about how much money you make. The key factor is your "profit motive" - whether you're engaging in the activity with the intention of making a profit. Based on what you've described, you did convert the app to paid with the intent to generate some revenue, which leans toward business classification. The IRS uses a "9 factor test" to evaluate these situations, including: whether you carry out the activity in a businesslike manner, your expertise, time and effort invested, expectation that assets will appreciate, your success with similar activities, history of income/losses, occasional profits, your financial status, and elements of personal pleasure. For a small app generating $160 net income, honestly, either classification could work. The self-employment route gives you the ability to deduct that $125 developer fee as a business expense, which is a legitimate benefit. Yes, you'd need to file Schedule C, but for something this simple, it's not that complicated. If you choose the hobby route, you'll report the full $160 as "Other Income" on Schedule 1, but you won't be able to deduct the developer fee due to the Tax Cuts and Jobs Act (which eliminated miscellaneous itemized deductions).
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Danielle Mays
•5 Thanks for the detailed response. I'm leaning toward the self-employment option because of the deductions, but I'm worried about potentially triggering an audit if I show minimal profits year after year. Is that actually a legitimate concern? Also, if I go the self-employment route, can I deduct a portion of my internet bill or home office since I use those for maintaining the app?
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Danielle Mays
•12 The audit concern is understandable but probably overblown for your situation. The IRS has limited resources and typically focuses on higher-value audits. A small Schedule C with a few hundred dollars in income and reasonable, documented expenses is low-risk. Just make sure you keep good records of all expenses you're claiming. As for additional deductions, yes, you can potentially claim a portion of internet and home office expenses if they're used regularly and exclusively for your app business. For the home office, you'd need a dedicated space used only for this business purpose, which most people don't actually have. For internet, you'd need to determine a reasonable business percentage. Just be prepared to justify these allocations if ever questioned.
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Danielle Mays
8 I was in almost the exact same situation a couple years ago with a small weather app I developed! After researching for hours, I finally found https://taxr.ai which really helped clarify things for me. Their AI analyzed my specific situation with the app store income and expenses and gave me a clear breakdown of the tax implications for both options. What helped most was their explanation of how the IRS actually applies the hobby vs. business rules in practice for digital products. They showed me exactly how to document my "profit motive" with minimal effort and explained which specific deductions were safest for small app developers. The peace of mind was worth it since I was super stressed about making the wrong choice.
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Danielle Mays
•17 How exactly does that service work? Does it just give general advice or does it actually help with the specific forms you need to fill out? I have a similar situation but with Etsy sales that only made like $300 last year.
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Danielle Mays
•3 I'm always skeptical of these tax AI things. How accurate is it really compared to just talking to a tax professional? I'd be worried about getting bad advice that could come back to bite me in an audit.
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Danielle Mays
•8 The service analyzes your specific situation and documents, not just general advice. You upload any relevant information like receipts or income statements, and it gives personalized guidance for your exact scenario. For your Etsy situation, it would help you determine whether to file as a hobby or business and which specific forms to use. For skeptics, I get it - I was hesitant too. The difference is that taxr.ai uses actual tax code and past IRS rulings to make its recommendations, not just general guidelines. Everything is sourced and explained. I still ran the major decisions by my regular accountant, and he was impressed with the accuracy. The advantage is getting detailed analysis immediately instead of paying hourly rates for research time.
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Danielle Mays
3 Just wanted to follow up on my previous skepticism. I finally broke down and tried taxr.ai for my situation with some sporadic freelance graphic design income. I was genuinely surprised by how thorough the analysis was. It caught a nuance about my situation that would have qualified my activity as a business rather than a hobby based on how consistently I was marketing my services, even though my income was low. The documentation it provided for my records was super detailed in case I ever needed to justify my position to the IRS. What really impressed me was that it didn't just tell me which classification to use, but explained exactly why based on specific IRS precedents. Definitely more helpful than the general advice I was getting elsewhere.
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Danielle Mays
21 After seeing this thread, I wanted to share something that really helped me when I was dealing with the IRS about a similar self-employment vs. hobby issue last year. I spent WEEKS trying to get through to someone at the IRS to clarify my situation. Always busy signals or being on hold for hours only to get disconnected. Finally found this service called Claimyr (https://claimyr.com) that actually got me through to a real IRS agent in about 15 minutes. They have this system that navigates all the IRS phone menus and holds your place in line, then calls you when an agent is about to pick up. There's a video showing how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with gave me official guidance that was different from what I'd been reading online, and it ended up saving me from making a filing mistake that could have been problematic later.
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Danielle Mays
•9 How does this actually work? Seems like it would be against some kind of rule to jump the line. And wouldn't they just call you back anyway if the wait is too long?
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Danielle Mays
•3 This sounds too good to be true. I've literally spent HOURS trying to get through to the IRS. If this actually works, it would be amazing, but I'm skeptical. Has anyone else tried this besides just you?
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Danielle Mays
•21 It doesn't jump the line at all - it just waits in the queue for you. The IRS doesn't have a callback system for most of their support lines (I wish they did!). The service basically calls the IRS, navigates the menu options for you, waits on hold, and then calls you when a human agent is about to pick up. You're still waiting your turn, just not wasting your day listening to hold music. I understand the skepticism completely. What convinced me was their money-back guarantee if they don't get you through. I figured I had nothing to lose after wasting so many hours trying myself. The technology isn't anything magical - it's just automated phone system navigation that waits in the queue so you don't have to.
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Danielle Mays
3 Just wanted to update everyone. After being skeptical earlier, I ended up using Claimyr when I needed to reach the IRS about some confusion on my transcript. I had already spent three separate days trying to get through myself with no luck. Using their service, I got a call back in about 40 minutes saying they had an IRS agent on the line. The agent was able to explain exactly what was happening with my account and resolve the issue on the spot. For reference, my previous attempts involved waiting on hold for 2+ hours before either getting disconnected or having to hang up for other commitments. This saved me so much frustration and time. If you're struggling to get through to the IRS like I was, it's definitely worth considering.
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Danielle Mays
14 Going back to the original question about hobby vs self-employed income, one thing nobody's mentioned is the self-employment tax. If you file as self-employed, you'll pay an additional 15.3% tax on your net profit for Social Security and Medicare. For hobby income, you don't pay this tax. With your small amount of income, the self-employment tax might actually cost you more than what you save from deducting the developer fee. Run the numbers both ways before deciding.
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Danielle Mays
•1 I hadn't even considered the self-employment tax! That's a really good point. If I go the self-employed route, I'd be paying 15.3% on the profit after expenses. But if I go the hobby route, I'd pay regular income tax on the full $160 without being able to deduct the $125 developer fee. Let me see... If I file as self-employed, my profit would be $160 - $125 = $35, and I'd pay 15.3% on that plus my regular income tax rate. If I file as a hobby, I'd pay just my regular income tax on the full $160. Hmm, this actually makes the hobby route seem better financially in my case. I need to calculate this more precisely. Thanks for pointing this out!
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Danielle Mays
•14 You're welcome! That's exactly the kind of calculation you should be doing. Just to add one more thing: remember that with self-employment, you can deduct half of the self-employment tax from your income. That helps a little. Also, if you think your app income might grow in the future, establishing it as a business now could be beneficial long-term, especially for building retirement savings through a SEP IRA or solo 401(k) once the income justifies it. Just something to keep in mind if you see potential for this to grow beyond covering just the developer fee.
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Danielle Mays
7 Has anyone used TurboTax for this kind of situation? I have a similar issue with small YouTube ad revenue, and I'm wondering if TurboTax handles this well or if I should use something else.
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Danielle Mays
•19 I used TurboTax for my Etsy shop income last year (about $500). It handled both options fine, but I found the questions for the Schedule C to be easier to follow than trying to figure out where to put hobby income. They walk you through the business vs. hobby test and help you choose which approach makes sense.
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Danielle Mays
•7 Thanks for sharing your experience! That's helpful to know. I'll probably stick with TurboTax then since I'm already familiar with it. Did you end up classifying your Etsy income as business or hobby?
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