Hobby or Business

Many people are engaged in hobby activities that are also a source of income. For example, selling handmade items online or at local markets. These income must be reported on tax return.

A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. This differs from those that operate a business with the intention of making a profit.

In determining whether their activity is a business or hobby, taxpayers must consider nine factors.

These factors are:

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 the taxpayer puts into the activity show they intend to make it profitable.
Whether they depend on income from the activity for their livelihood.
Whether any losses are due to circumstances beyond the taxpayer's control or are normal for the startup phase of their type of business.
Whether they change methods of operation to improve profitability.
Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business.
Whether the taxpayer was 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 the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.

All factors, facts and circumstances with respect to the activity must be considered. And, no one factor is more important than another.

If a taxpayer receives income from an activity that is carried on with no intention of making a profit, they must report the income they receive on Schedule 1, Form 1040 (typically on the "Other Income" line).

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

The Critical 2026 Tax Rule: Deducting Hobby Expenses

For the 2026 tax year, the most important distinction between a hobby and a business comes down to the treatment of expenses.

1. Hobby Income is Always Taxable (Form 1040, Schedule 1):

Income from a hobby must be reported on your tax return (typically on Schedule 1, Line 8j).

2. Hobby Expenses are Not Deductible (As of 2026):

Under the current tax structure, hobby expenses are generally classified as miscellaneous itemized deductions.
The Tax Cuts and Jobs Act (TCJA) suspended all miscellaneous itemized deductions subject to the 2% floor, which includes hobby expenses. This suspension is currently in effect through the 2025 tax year.
Crucially, even if the TCJA provisions were to expire or change in 2026, taxpayers would still only be able to deduct expenses up to the amount of the hobby's income and only if they itemize deductions. For the purposes of planning for 2026, the safest approach is to assume hobby expenses are not deductible at all.

3. Business Expenses are Fully Deductible:

If the activity qualifies as a business, all ordinary and necessary expenses are fully deductible from the business income on Schedule C. This reduces your Adjusted Gross Income (AGI) and your self-employment tax.
Furthermore, a business can claim a tax loss if its expenses exceed its income, which can offset other sources of income (subject to passive activity and business loss limits).

"Important Note on Hobby Deductions: As of the 2026 tax year, the expenses you pay for a hobby are generally not deductible under the current tax code. You must still report all hobby income, but you cannot claim a deduction for the related expenses."

Tips for taxpayers who make money from a hobby

Many people enjoy hobbies that are also a source of income. While these activities can be fun and rewarding, it’s critical to understand the tax implications for the 2026 tax year.

1. Report All Income

Taxpayers must report all income earned from a hobby on their federal tax return.

This income is typically reported on Schedule 1, Form 1040, as "Other Income."
This includes income from any 1099 forms you receive, cash payments, or online sales through platforms like Etsy, eBay, or Venmo/PayPal (subject to Form 1099-K reporting thresholds).

2. Know the Deduction Rule (No Deductions)

For the 2026 tax year, the most significant rule to remember is the treatment of expenses:

Hobby Expenses are Not Deductible. Under current tax law, expenses paid for a hobby, such as supplies, travel, or workshop fees, are classified as miscellaneous itemized deductions.
The Tax Cuts and Jobs Act (TCJA) suspended these deductions through the 2025 tax year. For 2026 tax planning, assume your hobby expenses are NOT deductible.
The Bottom Line: You must report all hobby income, but you cannot reduce that income by deducting your costs, leading to a higher tax liability than a comparable business.

3. The Importance of the "Profit Intent"

If you incur expenses that you want to deduct, you must meet the IRS standard of having a genuine intent to make a profit (i.e., operating a business).

If your activity consistently shows a loss, the IRS may reclassify it as a hobby during an audit.
To avoid this, review the nine IRS factors and take actionable steps to demonstrate a professional, profit-oriented approach (e.g., creating a business plan, actively marketing, separating finances).

Five Key Tax Tips for Hobbies vs. Businesses

Millions of people enjoy hobbies that are also a source of income. From catering to cupcake baking, crafting homemade jewelry to glass blowing, no matter what a person’s passion, understanding the tax rules is essential. The following tips are crucial for the 2026 tax year.

1. Is it a Business or a Hobby?

A key feature of a business is that people do it to make a profit. People engage in a hobby for sport or recreation, not to make a profit. Review the nine factors listed on this page when determining your intent, and base your determination on all the facts and circumstances. If the IRS believes you lack a profit motive, your activity will be classified as a hobby.

2. ⚠️ Critical Change: Hobby Expenses are NOT Deductible

This is the most important rule for the 2026 tax year:

Hobby Income is Taxable: You must report all income earned from the hobby.
Hobby Expenses are NOT Deductible: Under the current tax law (Tax Cuts and Jobs Act), hobby expenses are classified as miscellaneous itemized deductions that have been suspended. You must report all the income, but you cannot deduct any related costs.
The previous rules allowing deductions up to the amount of income are no longer in effect.

3. Track Expenses Anyway (The Smart Business Move)

While you can’t deduct hobby expenses, you should track them meticulously as if you were running a business.

Why? If you decide to transition to a profit-motivated business, or if the tax laws change, you will have the necessary records to support your deductions.
Action: Keep detailed receipts, bank statements, and a dedicated spreadsheet or accounting log for all income and expenditures.

4. How a Business Deducts Expenses

If your activity qualifies as a business:

Expenses are deducted on Schedule C, Profit or Loss From Business.
These expenses reduce your Adjusted Gross Income (AGI), which can lower your overall tax burden.
As a business, you may also be subject to Self-Employment Tax (Social Security and Medicare), which is an additional cost that hobbyists avoid.

5. Use IRS Free File for Simpler Filing

Hobby rules can be complex, and using tax software can make filing easier.

Income Limit: The income limit for the Guided Free File software is currently $84,000 (as of the 2025 tax year filing season), but this limit changes annually.
Access: Always start at the IRS.gov website to ensure you access the free software and meet the eligibility criteria.