Many people have a hobby, but did you know you can make money doing what you love without paying self-employment taxes? That’s because hobby income is different from other types of income (like self-employment income and income from your side hustle), and the IRS taxes each type differently.
Determining whether your revenue stream qualifies as hobby income isn’t always easy. So, it is important to know your income type and how to claim it on your tax return. Reporting your income in the wrong area on your return can lead to processing delays and might even land you a tax penalty.
What Is Hobby Income?
Hobbies sometimes generate income. And hobby income is exactly that, i.e., income that you make from a pastime or “hobby.”
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For example, if woodworking is your hobby, and people happen to love your crafts so much that they buy them, you might be able to claim your profits as hobby income. Hobbies aren’t limited to woodworking, however. Nearly any activity you enjoy can qualify as a hobby, including but not limited to:
- Photography
- Quilting
- Crocheting
- Content creation (videos, comics, etc.)
- Making jewelry
However, if you intended to make a profit when engaging in your hobby, the IRS defines your income as business income. Likewise, if you treat your hobby like a business (for example, hiring employees or paying for marketing), your earnings will probably not qualify as hobby income.
Is Hobby Income Taxable?
The IRS requires you to report all your income; hobby income is no exception. You will need to pay taxes on your income whether you profit from a hobby or a business. But the key difference is that taxpayers with hobby income (that is not considered business income) can avoid self-employment taxes.
The federal self-employment tax is 15.3%, so you could save a lot of money if your income from an activity or pastime qualifies as hobby income. And if your activity generates less than $400 in 2023, you don’t need to pay self-employment taxes, even if your income doesn’t qualify as hobby income.
Can You Deduct Hobby Expenses?
While defining your activity as a hobby can help you avoid federal self-employment taxes, in some cases, hobby income can increase your tax liability. That’s because you can’t deduct hobby expenses on your federal income tax return. So, if you had expenses related to your hobby (for example, crafting materials, travel expenses, etc.), you won’t be able to claim them on your tax return, which means you can’t subtract the costs from your taxable income.
Note: If you want to deduct your expenses, you will need to claim the income from your hobby as business income. But just because you consider your activity a business rather than a hobby doesn’t mean the IRS will agree (more on that below).
IRS Rules for Hobby Income
The IRS has several guidelines for determining whether income is considered hobby income or business income. Sometimes, what begins as a hobby can transform into a business. So, you should reassess your hobby for tax purposes each year.
- If you expect to make a profit this year or in future years, the activity might be considered business income.
- If you engage in your hobby for personal reasons rather than profit, your profits could qualify as hobby income.
- If you do not need to reinvest your profits into the hobby, the IRS might consider your activity a hobby.
- If your hobby provides your only (or main) source of income, it is likely considered a business.
- If your hobby is related to an activity you profited from in the past, the IRS might consider your activity a business.
- If you put tremendous effort into your hobby (for example, often staying up late to meet deadlines), the IRS might consider your activity a business.
- If hobby profits increase year after year, the IRS might determine it has transformed into a business.
Hobby Income vs. Business Income
Hobby income and business income each have their pros and cons. While you can’t deduct expenses from hobby income, you must pay self-employment tax on business income. But rather than trying to determine which type of income you’d rather have, you should consider which type of income the IRS classifies it as.
Misclassifying income can have unpleasant consequences. For example, claiming hobby income as business income could trigger an audit, and claiming business income as hobby income could result in underpayment penalties.
How to report hobby income or business income: If you determine you have hobby income, you will report the income on Line 8 (Other income) on Schedule 1 of Form 1040. You will report your income and expenses on Schedule C of Form 1040 if you have business income and are a sole proprietor (i.e., the only owner of an unincorporated business).
This can all be confusing. So, if you’re unsure whether your income is hobby income or business income, consult a trusted, qualified tax professional before you file your tax return.
