Okay, so I'm trying to file with TaxACT. I'm declaring $16,000 in MISC income from a hobby. I paid Q2 $3,000 in estimated tax payments in 2013 to be safe. Any advice out there? I'd prefer not to go through the hell of an audit. Maybe I should take a hit and end up paying in a chunk of money I don't have and make this a business activity? UGH!

I found some law and analyzed it as follows:

I do software development for open-source projects, such as custom Android ROMS and other software, and have done so since 2003.

When I am not at work or busy with other activities with my wife, I usually plop on the computer and play around with software. I do this with friends from around the world. I spend no more than 2 hours a day doing this. Normally, I only do this on the weekend or holidays.

I haven’t expected anything to gain value. In fact, I fully expect for my work to be useless within two years to anyone who finds it worthwhile today. I keep playing with new Android variations to try and see what I can do to them.

I have never declared a loss with my hobbies. I consider anything I do to be for pleasure, so there is no reason to deduct the fun and joy I get out of tinkering. If I were to declare expenses, I spend a couple thousand on electronics each year for tinkering.

I did not earn any income from this hobby until 2013. Two different people donated money at different times because they liked what the open-source software did and where it was going. The two people have since lost interest, but I continue onward.

I’m a W-2 employee in a different industry and make little income. I have debt out my eyeballs from school and a new home loan. I declared this money because I thought it was the proper thing to do. However, if it forces me to business income then I'm going to owe quite a bit.

All advice is very much appreciated.

In tough economic times, a lot of folks look for ways to supplement their incomes. One of the most popular options is to put your hobby skills to work.First you need to figure out if your project is a hobby or a business. That is, do you do it for pleasure, or to make a living? If it's a business, you can probably deduct the cost of your equipment and other expenses and fees on your tax return, even to the point of taking a loss. If it's a hobby, you can deduct only up to the amount of income you earned from the hobby. Which means that either way, you are supposed to report your income on your tax return. You get a tax refund when you show the government that the money you already gave them (usually withheld from your paycheck, or paid ahead as estimated taxes) is more than what you really owe them, based on how much taxable income you really had. If you didn't give them any money, you don't get any back (there are exceptions, particularly if you have a children).For many people, what they do is a hobby. It's something you do for fun, which sometimes brings in a little money. You would do it even if you lost money at it because it's something you enjoy. Technically, you are supposed to keep accurate records, report the amount you made from your hobby, and then deduct your hobby expenses on Sch of 1040. BUT, depending on lots of other factors, filing a Sch A of 1040 may or may not be the most beneficial way for you to file. Even if you do file a Sch A, your hobby expenses are limited. you have to itemize to claim the expenditures. They are counted as part of any miscellaneous expenses you have on Sch A. And your miscellaneous expenses must exceed 2 percent of your agi before you can deduct them. So the tax breaks associated with reducing hobby income aren't that great. Maybe you should consider turning your hobby into a business.I am saying that if your hobby is a viable money maker, operate it as a side businesses on weekends or evenings. As long as it's a sole proprietorship, you can include the income as part of your regular personal income tax return by filing Sch C or C-EZ and need to paySECA tax aslongas the amount reported on SCh SE line 2 or 3 is $400 or exceeds $400;if . you are filing as a sole proprietor, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1K or more when you file your return.However, you do not have to pay estimated tax for the current year if you had no tax liability for the prior year;You were a U.S. citizen or resident for the whole year;Your prior tax year covered a 12 month period. If you are trying to make it a source of living income, then you may be considered a business. You absolutely must keep records of your income and expenses. There are pros and cons to being a business. I guess you need to contact he IRS for more info in detail.

I think I'll just go with business income because it seems safer from other hassles.

The unfortunate part is that my return would be $1850 as a hobby and only $1200 as a business with the various expenses I used for purchases I bought for my (hobby) activity.

The loss sucks, but it's acceptable to save from IRS headaches if it does so.

I'm curious, do you think that a total of $6,000 expenses on $16,000 is too excessive? Again, I searched my invoices and creditcard statements to come up with this. But, I don't want to get excessively targeted.