I'm earning income on the side. Is it a business or a hobby?

A business operates to make a profit. People engage in a hobby for sport or recreation, not to make a profit.

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

You must consider the following 9 things when determining if an activity is a hobby or a business:

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Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.

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• Whether the time and effort you put into the activity show you 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.

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Deducting expenses

 

Businesses are entitled to deduct their expenses from their sales in order to determine their taxable profit.

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If you have a hobby, your sales are reported as income and you can deduct your expenses to up the amount of your sales. On the other hand, hobby expenses can only be deducted as a personal itemized deduction under the miscellaneous deduction category. Until 2025, that category is not deductible at all. The result is that the sales from a hobby are fully taxable without being able to deduct expenses.

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Also read

• What is the sharing or gig economy?

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