You didn’t set out to make money. You were just doing something you loved, whether it was drawing, baking, gardening, or coaching. Then someone offered to pay you. And then someone else. Before long, your hobby was bringing in income. That’s when the IRS takes notice.
Not sure if your activity counts as a business or just a hobby that happens to bring in cash? That difference matters. It decides how you report income and whether you can deduct the cost of doing what you love.
Here’s a clear look at what sets a business apart from a hobby, what the IRS cares about, and how to stay on top of the tax side of things when your passion project picks up steam.
How the IRS Draws the Line
The IRS focuses on intent. A business exists to make a profit. A hobby exists for personal enjoyment, even if it brings in a little money. That intent shapes everything — from how you report your income to whether you can deduct expenses.
What a Real Business Looks Like
When you treat your activity seriously, the IRS takes notice. Keeping separate financial accounts, logging expenses in real time, and revisiting your business strategy to improve profit are all signals that this is more than a pastime.
If the income supports your budget, if you regularly invest time in the activity, or if you’ve seen profit in three of the last five years, the IRS might call it a business.
How Hobbies Stand Apart
A hobby looks different. If you only dabble occasionally, keep no real records, or would keep doing it even without pay, the IRS may see it as a personal activity rather than a business. Earning a bit of money from something you enjoy does not automatically make it a business in their eyes.
When Fun Becomes Taxable
Say you design logos for friends, sell handmade candles online, or teach yoga classes at your community center. These activities might start casually, but as the income grows, the IRS may reclassify what you do. On the other hand, if you sell herbs from your garden once a year or take paid photos for a friend’s wedding as a one-off, it may remain a hobby.
Activities the IRS might see as businesses:
- Freelance creative work like writing or graphic design
- Coaching or personal training gigs
- Running an online store or catering side hustle
Activities that may stay in hobby territory:
- Selling crafts or baked goods for fun
- Playing paid gigs with your band now and then
- Entering contests or occasionally monetizing a podcast
The IRS provides a full breakdown in their Fact Sheet. But know this: hobby expense deductions are currently suspended until 2026, even if you still have to report the income.
Why It Matters to the IRS
Hobby income is fully taxable, but hobby expenses cannot be deducted. Business income, on the other hand, allows for deductions and can even help lower your overall tax burden.
If the IRS determines you’re running a business, you may:
- Write off qualified expenses like supplies or software
- Deduct losses from your other income sources
- Reduce your tax bill with legitimate deductions
This matters more than most people realize. Treating your venture like a business, when appropriate, could keep more money in your pocket.
Walking the Line Between Hobby and Business
It’s common for hobbies to evolve. You start small, make a little money, and realize it’s more than just fun. When that happens, it’s time to shift your mindset and your records.
Start by tracking your income and expenses. Take time to plan, even at a basic level, think about your brand, audience, and long-term goals. If you’re investing in tools, subscriptions, or even a website, filing taxes as a business can give you real benefits.
This also means filing a Schedule C and keeping better records. Doing so positions you for deductions and creates a paper trail that can stand up to IRS scrutiny.
The IRS Probably Already Knows
You might assume your side income is under the radar. But with third-party platforms like PayPal, Venmo, and Stripe required to report payments using Form 1099-K, that assumption is risky. And the thresholds are changing fast:
- $5,000 in 2024
- $2,500 in 2025
- $600 in 2026
That does not include other reporting forms like 1099-NEC or 1099-MISC, which are already widely used. If your clients deduct your services on their taxes, the paper trail becomes even stronger.
The safest route is to assume the IRS knows — and report all income accurately.
Where and How to Report It
Type of income determines how you report and whether you get any deductions.
Hobby income
- Reported on Schedule 1, Line 8 as “Other Income”
- No deductions allowed, at least until 2026
Business income
- Reported on Schedule C
- Eligible for deductions that lower your tax bill
Want help deciding what qualifies as a business expense? The IRS has a full guide for that.
The bottom line
If your hobby has shifted into something more serious — or more profitable — it’s worth looking at how you report it. The right classification could offer real tax benefits.
Keep these takeaways in mind:
- Income from hobbies is taxable, even if deductions are not allowed
- Treating your side activity like a business unlocks deductions
- Keep detailed records of expenses, especially as income grows
- Be mindful of new reporting rules and stay compliant
Still unsure whether your side gig counts as a hobby or business? We’re here to help.
