The IRS has a few criteria to distinguish a money-making hobby from a business, from a tax stand point. They’re not very concrete, and probably entirely up to you to decide where you fall, unless of course you get audited. There are a few things you should know about making money with a hobby and that line between hobby and business.
- Any money you make with your hobby is taxable income. For example, let’s say you start selling scarves on etsy.com. Any money you make from that, even if it’s just $25, should be accounted for on your income taxes. It should be entered on Form 1040, line 21.
- You can deduct hobby expenses, but only up to the amount of hobby income. So let’s say you spend $100 in a year on your hobby, but you only make $75. Then you can only deduct $75 on your taxes.
- It may behoove you to turn your hobby into a business anyway, for tax purposes. Businesses usually get to deduct all of their expenses, so instead of only writing off $75 you would get to write off the whole $100. Unfortunately, if you turn a profit in such a business, you’ll have to pay more taxes as the owner of a self-employed business (as much as 15.3%).
- If you make a profit in three out of five tax years, it qualifies as a business and you’re subject to all the other taxes.
For more specifics, go here to the IRS page on the topic. Whatever you decide to do, take advantage of the tax-write offs. Every deduction on your taxes adds up.