HELPFUL INFORMATION FOR YOUR BUSINESS DURING COVID-19

Share on facebook
Facebook
Share on reddit
Reddit
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on digg
Digg
Share on email
Email

Do I have a hobby or business?

You found something that you really enjoy doing. You’re good at it. Damn good at it in fact. Word has gotten out and now people are starting to pay you for it. That’s awesome! But is it more than just a hobby – has it turned into a business? This is a common question and an important one for you (as a taxpayer) and the IRS. At what point is a hobby considered a business, and what are the tax implications? Let’s look at more general questions first before diving into the weeds of hobby vs. business.

Do I have to file taxes for my hobby income?

Yes. Anytime you earn revenue, that revenue needs to be reported on a tax return. It doesn’t matter if it is a hobby or a business. If you get paid, you need to report it.

Can I deduct expenses for my hobby?

No. Years ago, you could actually deduct expenses for a hobby. But due to a change in 2018, you can no longer deduct expenses if you consider this income-producing activity just a “hobby.” 

Why does it matter if it’s a “hobby” or “business”?

There are two consequences you should consider : 

  1. You cannot deduct expenses for a “hobby,” so your tax liability will be higher than filing as a business (where expenses would offset your taxable income)
  2. The forms you fill out are different. An accountant or tax software can assist in this area. But if you’re filing your taxes the old fashioned way – on paper – you’ll need to be familiar with the necessary forms. Hobby income is reported on Schedule 1 of Form 1040. Schedule C is used to report profits and losses and deduct expenses for a business.

The Small Business and Self-Employed Tax Center from IRS.GOV has more information (or, ask your accountant!).

So what’s the difference? 

A business operates with the intent to make a profit. People engage in a hobby for sport or recreation, not to make a profit. If you’re still not certain, consider the following questions: 

  • Are you receiving professional advice or assistance? 
  • Are you keeping accurate accounting records and using this info to increase revenue?
  • How much time are you putting in? Is it enough to make sure it is running successfully? 
  • Are you actually doing this to make money? Or are you doing it for fun, and you just happen to make money?
  • Were you successful in making a profit in similar activities in the past.
  • Do you depend on income from the activity for your livelihood?

If your answer is yes to most of these…you have a business on your hands. As mentioned before, this means that you can claim your business expenses and reduce your taxable income. 

Bottom Line

You need to think about your intent with an income-making activity, consider how much money it makes, and the amount of expenses it requires. While you can list hobby income with your “other income” without paying self-employment taxes, keep in mind that you cannot claim expenses. If your income is significant, your expenses are significant, or you intend to make a profit, it’s time to call your former hobby a business. 

If you’re looking for additional tax information, check out our articles on the home office deduction during the pandemic, pandemic-related tax deductions (or not)tax planning explained, and preparing to file 2020 taxes.

About the Author

Rachel Law

Rachel Law

Rachel Law, Marketing Manager at Numberwise, has over 12 years of experience in marketing and communications. She coordinates content for all of our marketing channels, and loves a good meme. Rachel is a health and fitness enthusiast who enjoys yoga and running. She has 2 kids and a growing number of indoor plants which may or may not have names.
Rachel Law

Rachel Law

Rachel Law, Marketing Manager at Numberwise, has over 12 years of experience in marketing and communications. She coordinates content for all of our marketing channels, and loves a good meme. Rachel is a health and fitness enthusiast who enjoys yoga and running. She has 2 kids and a growing number of indoor plants which may or may not have names.
SHARE THIS POST
Share on facebook
Facebook
Share on reddit
Reddit
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on digg
Digg
Share on email
Email

More Blogs to Explore...

Stressed Business Owner
Business Management
Steve Turk

Get Out of My Head

Running a business is stressful! You worry about your company, employees, and customers. It can feel like the weight of the world is on your

Read More »

Leave a Reply

Your email address will not be published.

Owl-1-yellow-transparent

Ready to get started?

We would love to help! Send us a message and we will get back you you shortly.

Stay Informed!

Sign up for our newsletter and stay up-to-date on all things Numberwise.

Name(Required)
This field is for validation purposes and should be left unchanged.

This website uses cookies to ensure you get the best experience on our website.