The line between having a hobby and running a business can often be confusing, but knowing the difference is critical because hobbies and businesses are treated differently when it’s time to file your taxes. The biggest difference between the two is that hobbies are for pleasure or recreation while businesses operate to make a profit.
Whether you are having fun with a hobby or running a business, if you accept more than $600 for goods and services using online marketplaces (i.e., Amazon, eBay) or payment apps (i.e., Venmo, PayPal, Stripe), you could receive a Form 1099-K. Profits from the sale of goods, including personal items, and services are taxable income that must be reported on tax returns.
There are a few other factors people should consider when deciding whether their project is a business or Hobby. No one single factor is the deciding attribute. Taxpayers should review all of the factors to make a good decision.
How taxpayers can decide if it’s a hobby or business
Per the IRS, the below questions can help taxpayers decide whether they have a hobby or business:
- Do they carry out the activity in a businesslike manner and keep complete and accurate books and records?
- Does the time and effort they put into the activity show they intend to make a profit?
- Does the activity make a profit in some years – if so, how much profit does it make?
- Can they expect to make a future profit from the appreciation of the assets used in the activity?
- Do they depend on income from the activity for their livelihood?
- Are any losses due to circumstances beyond their control or are the losses normal for the startup phase of their type of business?
- Do they change their methods of operation to improve profitability?
- Do the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business?
If a taxpayer receives income from an activity that is carried on with no intention of making a profit, they must report the income they receive on Schedule 1, Form 1040, line 8.
Hobby revenue is subject to income tax, but you won’t have to pay any self-employment tax. Furthermore, the IRS no longer allows you to deduct hobby-related expenses to offset your other income. Prior to the Tax Cuts and Jobs Act, hobbyists were allowed to deduct miscellaneous expenses up to the amount of hobby income they earned. As of tax year 2022, you cannot deduct hobby expenses.
Whether you have a hobby or run a business, good record keeping is always key when it’s time to file taxes.
Article by Zaid Butt, Director
