Many people earn extra income from activities they enjoy. Whether it’s selling handmade products, offering freelance services, creating content online, or running a side hustle, it’s important to understand whether the IRS considers that activity a hobby or a business.
While the distinction may seem minor, it can affect how income and expenses are reported on your tax return.
What’s the Difference?
According to the IRS, a business operates with the intention of making a profit, while a hobby is primarily pursued for recreation or personal enjoyment.
There is no single factor that determines whether an activity is a hobby or a business. Instead, the IRS looks at the overall circumstances.
Questions to Consider
The IRS recommends asking several questions when evaluating an activity:
• Is there an intent to make a profit?
• If the activity earns money, how much profit does it generate?
• Is there a reasonable expectation of future profit?
• Do you depend on income from the activity for your livelihood?
• Are losses due to circumstances beyond your control or are they typical startup losses?
• Have you changed operations to improve profitability?
• Do you maintain complete and accurate books and records?
• Do you have the knowledge or professional advice needed to operate successfully?
No single answer determines the outcome. Instead, taxpayers should review all factors together.
Don’t Forget About Tax Reporting
Whether an activity is a hobby or a business, income is generally taxable.
If you receive payments through payment apps for goods or services, you may receive Form 1099-K. Those payments generally must be reported on your federal tax return.
Similarly, taxpayers who receive certain digital asset payments may receive Form 1099-DA.
Why Recordkeeping Matters
Good recordkeeping is important regardless of whether you’re operating a business or pursuing a hobby.
Maintaining organized records throughout the year can help you:
• Track income
• Document expenses
• Prepare tax returns more accurately
• Respond to IRS questions if they arise
Why This Matters for Blind Entrepreneurs
Entrepreneurship is a popular path to earning income for many blind and low vision individuals who may face barriers in traditional employment.
Whether you’re selling products, offering services, consulting, creating content, or running a side business, understanding how the IRS classifies your activity can help you avoid surprises at tax time.
Penny Forward’s Bottom Line
Many hobbies generate income, but not every income-producing activity is considered a business for tax purposes.
Understanding the difference can help you keep accurate records, meet your tax obligations, and make informed decisions as your activity grows.
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