When it comes to earning income from a side gig of any sort you are in one of two worlds: Business Income or Hobby Income.

There are advantages and disadvantages to each classification. If you are in the business of fill-in-the-blank, you are able to deduct all “ordinary and necessary” business expenses against your business income, but your net (after expenses) business income is subject to income tax and self-employment tax (an additional 15.3%). On the other hand, if your activity is classified as a hobby, you do not deduct any expenses, you pay income tax on 100% of your hobby income (less any cost of goods sold – think materials used to make a product), but your hobby income is not subject to self-employment tax.

Although there is not a bright-line test (i.e. income over $x is always business income), the IRS does provide guidance and outlines various factors to help determine if an activity is a business or a hobby. You can find a list of those factors here.

Maybe an example is helpful. If your 15 year-old son walks down your street, knocks on some doors, and mows 3 yards this summer, this activity would likely be classified as hobby income. He would not deduct the cost of the mower or gas, but his hobby income would only be subject to income tax, not self-employment tax. If this is his only income for the year, it’s likely he would not even be required to file an income tax return. If next year, when your son turns 16, he buys a truck, trailer, and riding lawn mower, prints business cards and yard signs, and mows 30 yards, he has likely crossed over from hobby income to an active business activity.