Earning income on the side: Is it a hobby or a business?

Whether it’s something you’ve been doing for years or something you just started to make extra money, you must report income earned from hobbies.

What the difference between a hobby and a business? A business operates to make a profit. People engage in a hobby for sport or recreation, not to make a profit.

Here are nine things you must consider when determining if an activity is a hobby or a business:

  • Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.
  • Whether the time and effort you puts into the activity show yu intend to make it profitable.
  • Whether you depend on income from the activity for your livelihood.
  • Whether any losses are due to circumstances beyond your control or are normal for the startup phase of their type of business.
  • Whether they change methods of operation to improve profitability.
  • Whether you and your advisors have the knowledge needed to carry out the activity as a successful business.
  • Whether you were successful in making a profit in similar activities in the past.
  • Whether the activity makes a profit in some years and how much profit it makes.
  • Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

IRS Resources

Publication 17, Your Federal Income Tax

Publication 525, Taxable and Nontaxable Income

Publication 535, Business Expenses

Publication 334, Tax Guide for Small Business, For Individuals Who Use Schedule C