When it comes to filing taxes, how you categorize your side activity — as a hobby or a business — makes a big difference. The key distinction is simple: a business is run with the intent to make a profit, while a hobby is done primarily for personal enjoyment or recreation.
This classification matters because it affects how income is reported, what deductions are allowed, and how the IRS treats your activity overall.
Even if the activity is small or done informally, it can still have tax consequences. If you receive payments through third-party apps like Venmo, PayPal, or Cash App for goods or services, you may be issued Form 1099-K — and that income must be reported on your federal tax return, regardless of whether you consider it a hobby or a business.
How to Determine If It’s a Business or a Hobby
There’s no single test that defines your activity. Instead, the IRS considers several factors, and so should you. Here are the key questions to ask yourself:
- Do you intend to make a profit?
- Do you depend on the income from this activity to support yourself?
- Are you actively working to improve profitability?
- Are you keeping thorough, accurate records like a business would?
- Have you made a profit from this activity in the past? If so, how much?
- Are any losses due to typical startup costs or outside circumstances?
- Do you or your advisors have the necessary knowledge to run the activity successfully?
- Do you expect the assets used in the activity to appreciate over time?
Answering "yes" to several of these questions can point toward your activity being a business rather than a hobby — and that brings with it more responsibility and potentially more tax deductions.
Why It Matters
The IRS treats business income and expenses differently from hobby income. Business owners can deduct necessary and ordinary expenses tied to their operations, potentially lowering their taxable income. Hobbyists, on the other hand, must report income, but they typically cannot deduct expenses related to the hobby under current tax laws.
Regardless of how the activity is classified, keeping good records throughout the year is essential. Documentation not only helps at tax time but also supports your position in case the IRS has questions.
If you're unsure whether your activity qualifies as a business or hobby, consider consulting a tax professional. Making the right classification now can save you trouble — and possibly money — down the line.
For more information, visit: IRS: Help to Decide Between a Hobby or Business