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 a 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 circumstances 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 nos than yeses, your activity is 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 gets 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 expenses, but 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 the IRS's safe harbor rule, which allows that if you've turned a profit for at least three out of the last five years, the IRS will presume you're engaged in the activity for profit.
