Did you know the IRS treats hobbies and businesses very differently when it comes to taxes? The key difference boils down to intention.
Businesses are started with the goal of making a profit, while hobbies are activities you enjoy without necessarily expecting to earn money.
But here’s where it gets tricky: Even if you’re pursuing a hobby, if you receive payments through apps like Venmo, PayPal, or Cash App for goods and services, you may still receive an IRS Form 1099-K. That income must be reported on your federal tax return, whether it came from a business or hobby.
So how do you know if what you’re doing is considered a hobby or a business in the eyes of the IRS? There’s no single deciding factor, but here are some questions to ask yourself:
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Do you intend to make a profit?
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Have you been making a profit, and if so, how much?
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Do you expect assets related to this activity to increase in value?
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Do you rely on income from this activity to cover your living expenses?
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Are any losses due to things outside your control, or are they typical startup losses?
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Have you adjusted how you operate to try to make it more profitable?
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Do you keep detailed and organized records for the activity?
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Do you (or your advisors) have the expertise needed to run this as a business?
Ultimately, the IRS looks at all of these factors together. No single answer determines the outcome, but they help build the full picture.
Whether your passion project is officially a hobby or a business, keeping thorough records throughout the year is crucial. It not only makes tax filing easier but also protects you if questions arise later.
Have questions about whether your side activity qualifies as a business or hobby? We’re here to help you navigate the rules, report your income correctly, and plan proactively to minimize surprises at tax time.
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