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Let's say I have a day job that contributes to the majority of my income.

Now if I do some Android development (or similarly iPhone, Blackberry, or any other hobby that produces an additional income) and make some money by selling apps, how should I report this income on my taxes? Google takes a 30% cut, and gives you the rest without taking out any taxes, neither does Google report it to the IRS (unless subpoenaed).

What is the proper way to report this additional income on my taxes? Any other suggestions or advice regarding this matter?

Currently I have only one app that makes money via donations (< $20/month at the moment), but I do plan on making more apps for the purpose of actually producing an income.

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3 Answers 3

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You would report it as business income on Schedule C. You may be able to take deductions against that income as well (home office, your computer, an android device, any advertising or promotional expenses, etc.) but you'll want to consult an accountant about that.

Generally you can only take those kinds of deductions if you use the space or equipment exclusively for business use (not likely if it's just a hobby). The IRS is pretty picky about that stuff.

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If this is truly hobby income (you do not intend to operate as a business and don't have a profit motive) then report the income on Line 21 ("other income") of form 1040.

If this is a business, then the income and expenses belong on a Schedule C to form 1040.

The distinction is in the treatment of profits and losses - your net profits on a business are subject to self-employment tax, while hobby income is not. Net losses on a business are deductible against other income; net losses on a hobby are miscellaneous itemized deductions in the "2%" box on Schedule A.

From a tax point of view, selling apps and accepting donations are different.

Arguably, donations are gifts; gifts are not taxable income.

The hobby/business and income/gift distinctions are tricky. If the dollar amounts are small, nobody (including the IRS) really cares. If you start making or losing a lot of money, you'll want to get a good tax person lined up who can help you decide how to characterize these items of income and expens, how to put them on your return, and how to defend the return on audit if necessary.

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Hmm... Interesting fine line there between the hobby/business to ponder. At the moment I only have this one app in which people can donate, but I do eventually intend to make a profit off of other apps. –  Bryan Denny Aug 23 '10 at 21:09
    
"If the dollar amounts are small, ..." What is a rough guide to what counts as "small"? –  DarenW Nov 29 '10 at 23:35
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I think it depends on who is being paid for your app. Do you have a company the is being paid? Or is it you personally?

If you have a company then that income will disappear by offsetting it through expenses to get the software developed.

If they are paying you personally then you can probably still get the income to disappear by file home-office expenses.

I think either way you need to talk to an accountant.

If you don't want to mess with it since the amount of income is small then I would think you can file it as additional income (maybe a 1099).

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I am personally being paid, not a company –  Bryan Denny Aug 23 '10 at 19:10
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