Do you take photos of family members, design business logos for friends, sell crafts on Etsy, or flip refinished furniture on Facebook Marketplace? Many people earn a little income from activities that are more hobbies than business, but you might not realize that income is taxable in the eyes of the IRS.
What is hobby income?
Hobby income is any income from an activity you pursue because you enjoy it, with no intention of making a profit.
But how does hobby income differ from a business? The IRS looks at nine different factors when deciding whether your activity is a hobby or a business.
- Do you act in a businesslike manner and maintain accurate books and records?
- Do you put time and effort into the activity to make it profitable?
- If you lose money on the activity, is it due to circ*mstances beyond your control?
- If the activity isn't profitable, do you change tactics to improve profitability?
- Do you have the knowledge needed to carry out the activity as a successful business?
- Has the activity turned a profit in some years?
- Have you been profitable in similar activities in the past?
- Do you depend on the activity for your livelihood?
- Do you expect to make a future profit from the appreciation of the assets you use in the activity?
Generally, if your answers to these questions include more no responses than yes responses, your activity is considered a hobby.
How to report hobby income
If you earn hobby income, you must report the income on Schedule 1, Additional Income and Adjustments to Income. Schedule 1 is attached to your Form 1040.
But where do you report hobby expenses? Unfortunately, hobby expenses aren't deductible.
Prior to the Tax Cuts and Jobs Act (TCJA) of 2017, you could deduct hobby expenses as a miscellaneous itemized deduction on Schedule A, Itemized Deductions. However, you could not claim more hobby expenses than hobby income. For example, if you earned $500 selling crafts on Etsy but spent $1,000 on supplies for those crafts, you could only claim $500 of those expenses. Plus, you could only deduct total miscellaneous itemized deductions that exceeded 2% of your adjusted gross income.
The TCJA eliminated miscellaneous itemized deductions—at least through 2025—so hobby expenses are no longer deductible even though hobby income is still taxable.
When does a hobby become a business?
If your activity is a business, the income and expenses are treated very differently. First, income and expenses are reported on Schedule C, Profit or Loss from Business. And if you have more expenses than income, you can use those losses to offset other income, such as wages from a job.
It may be tempting to classify your hobby as a business in order to be able to deduct expensesbut keep in mind the criteria the IRS uses to determine whether an activity is a hobby or business mentioned above.
If the IRS determines that you've classified your hobby as a business just to take the tax write-offs, you could face an IRS audit and risk having your income reclassified, expenses denied, and face additional tax, penalties, and interest.
If you're worried about having a legitimate business flagged as an audit, be sure to keep records documenting your business plan, the time you spend on the business, and your business revenues and expenses. Also, keep in mind theIRS rule about presumption of profit. An activity is presumed carried on for profit if it produced a profit in at least three of the last five tax years, including the current year. (Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least two of the last seven tax years, including the current year.) The activity must be substantially the same for each year within this period. You have a profit when the gross income from an activity exceeds the deductions. The IRS will presume you are engaged in the activity for profit if you meet the presumption of profit test.
Find out more about Personal Taxes
FAQs
Is hobby income taxable? The IRS requires you to report all your income; hobby income is no exception. You pay taxes on your income whether you profit from a hobby or a business. However, the key difference is that taxpayers with hobby income (not considered business income) can avoid self-employment taxes.
How much money can you make as a hobby before paying taxes? ›
How much money can I make from my hobby without owing tax? If you earn more than $400 in a calendar year from your hobby, you should file a return and report it as self-employed income on your taxes.
What is the IRS hobby rule? ›
If your business claims a net loss for too many years, or fails to meet other requirements, the IRS may classify it as a hobby. If the IRS classifies your business as a hobby, it won't allow you to deduct any expenses or take any loss for it on your tax return.
At what point does a hobby turn into a business? ›
The primary rule for determining whether an activity is a business or a hobby is if it produced a profit in at least three out of five years. Other considerations could come into play. However, that's not definitive. We'll discuss how turning your hobby into a business can affect your taxes and what the IRS looks for.
How does the IRS know if you have a side hustle? ›
If you get paid electronically for a side hustle, small business or selling things online, you may need to pay taxes. Payment apps and online marketplaces might issue a Form 1099-K, informing you and the IRS of how much money you got for selling things or providing a service.
Is selling crafts considered income? ›
Annual Income Taxes for Handmade Sellers. Annual income tax is (as the name implies) due on a yearly basis and is basically a tax on the income you have made in the past calendar year. Any sales of products and services in the year need to be declared as “self-employment income”.
Do I have to report my side hustle? ›
Do I need to report my side hustle income? Any net earnings from self-employment that are $400 or more in a given calendar year are subject to income taxes, regardless of whether you receive a 1099 form. You must report these earnings on federal and state income tax filings.
What is the five hobby rule? ›
According to the five hobbies rule, you need one hobby to keep you active, one to keep you creative, one to make you money, one to build knowledge, and one to evolve your mindset! So, have you heard of this rule before?
How do you prove your hobby is not a business? ›
These factors are whether:
- The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records.
- The taxpayer puts time and effort into the activity to show they intend to make it profitable.
- The taxpayer depends on income from the activity for their livelihood.
An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).
Hobby cons:
Sometimes, you may make a significant investment for no financial return. You can't deduct hobby-related expenses on your taxes. No financial profit.
What is the 3 hobby rule? ›
One to keep you creative, one to keep you fit and one to make you money. As a huge proponent of hobbies, it must be said, not all hobbies are created equally, and not all serve the same purpose.
What hobby expenses can I deduct? ›
Hobby Income and Expenses
If the activity is a hobby, you will report the income on Schedule 1, line 8 of Form 1040. The income won't be subject to self-employment tax. Because of a change made as part of tax reform, you won't be able to deduct expenses associated with your hobby.
Do I have to pay taxes on hobby income? ›
Is hobby income taxable? The IRS requires you to report all your income; hobby income is no exception. You pay taxes on your income whether you profit from a hobby or a business. However, the key difference is that taxpayers with hobby income (not considered business income) can avoid self-employment taxes.
Does selling personal items count as income? ›
If you sell at a gain--that is, you get more than you paid for the item--you have income. If you sell an item for less than you paid for it, you have a loss.
How do you earn invisible income the IRS can't touch? ›
Examples of nontaxable sources of income include veterans' benefits and life insurance payouts.
- Veterans' Benefits. ...
- Child Support Payments. ...
- Welfare Benefits. ...
- Workers' Compensation. ...
- Foster Care Payments. ...
- Casualty Insurance. ...
- Payments From a State Crime Victims' Fund. ...
- Inheritances.
Generally, whether you have to collect sales tax for a hobby will depend on whether you engage in the hobby for sport, for recreation, or to make a profit. However, according to the IRS, if you make money from a hobby without the intent of making a profit, you'll still have to report the income.
Do I have to pay taxes on my Etsy shop? ›
Once you start making a profit on Etsy – your income exceeds store expenses – your store qualifies as a business and has to comply with national tax laws and regulations. If you don't intend to profit, your Etsy store might qualify as hobby income and is not taxable.
Do you have to pay taxes on stuff you sell? ›
Retail sales of tangible personal property in California are generally subject to sales tax. Examples of tangible personal property include such items as furniture, giftware, toys, antiques and clothing.
Is hobby passive income? ›
Make money: Taking up a hobby is a great way to create passive income so you can make ends meet and live more comfortably. Learn a new skill: A hobby is a great excuse to learn something new and develop your skills.
