Selling a few paintings, flipping thrift finds or streaming games can be a hobby or a business in the eyes of the IRS. The label matters: a business can deduct its expenses, a hobby cannot — but income from both is taxable.
Why it matters
| Business | Hobby | |
|---|---|---|
| Income taxable? | Yes, on Schedule C | Yes, as other income |
| Expenses deductible? | Yes | No, under current law |
| Self-employment tax? | Yes, on profit over $400 | No |
| Losses offset other income? | Generally yes | No |
Hobby income avoids self-employment tax, but because hobby expenses can’t be deducted, you are taxed on gross receipts. For anything with real costs, being a business is usually better — as long as it genuinely is one.
How the IRS decides
The core question is whether you do the activity to make a profit. The IRS looks at factors including:
- Whether you run it like a business, with separate accounts and records
- The time and effort you put in
- Whether you depend on the income
- Your expertise, or whether you consult experts
- Whether you change methods to improve profitability
- Your history of profit or loss, and the size of any profits
- Whether losses come from circumstances outside your control or a normal startup phase
- How much personal pleasure or recreation is involved
- Whether assets used in the activity might rise in value
No single factor decides it. There is also a presumption: if an activity made a profit in at least 3 of the last 5 years (2 of 7 for horse breeding and racing), it is presumed to be for profit.
How to look like — and be — a business
- Open a separate bank account and keep every receipt.
- Write down a simple plan: what you sell, to whom, at what price.
- Track time spent and results, and adjust when something doesn’t make money.
- Get any local licenses or sales tax registrations you need.
- Price for profit, not just to cover materials.
Reporting it
Business profit goes on Schedule C and Schedule SE; set aside for both income tax and self-employment tax using the set-aside calculator. Hobby income goes on Schedule 1 as other income. If you are unsure which applies, read taxes on side hustle income and talk to a tax professional before claiming large losses.