What are the tax rules for hobby income?

IRS Guidelines for Reporting Hobby Income

Determining if an Activity is a Hobby or a Business

The IRS distinguishes between hobbies and businesses based on various factors, which affect how income and expenses are reported. Here are the key considerations:

- Businesslike Manner: If the activity is carried out in a businesslike manner, including maintaining complete and accurate books and records, it may be considered a business.

- Time and Effort: The time and effort put into the activity to make it profitable suggest a business motive.

- Income Dependence: Dependence on income from the activity for livelihood leans towards a business.

- Personal Motives: Engaging in an activity for enjoyment or relaxation indicates a hobby.

- Profitability: A history of making profits in similar activities, profitability in some years, and the potential for future profits from asset appreciation are signs of a business.

- Losses: Losses due to normal startup phases or circumstances beyond control may not necessarily indicate a hobby if other factors point to a business.

Reporting Hobby Income

If an activity is determined to be a hobby, the following guidelines apply for reporting income:

- Income Reporting: Income received from a hobby must be reported on Schedule 1 (Form 1040), line 8. This includes all income from the hobby without the intention of making a profit.

- Expense Deductions: Under the Tax Cuts and Jobs Act, taxpayers can no longer deduct expenses related to their hobbies. This means that hobby expenses cannot offset hobby income.

Additional Considerations

- Form 1099-K: If you accept more than $600 for goods and services using online marketplaces or payment apps, you may receive a Form 1099-K, which reports payments to the IRS and to you. All income, regardless of whether it's from a hobby or business, must be reported on your tax return.

- Record Keeping: Good record keeping is essential, whether you have a hobby or run a business, especially when it's time to file taxes.

Conclusion

It's important to accurately determine whether your activity is a hobby or a business, as this affects how you report income and expenses. Always report hobby income as required by the IRS, but remember that hobby expenses are no longer deductible.

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Sources:

Here’s how to tell the difference between a hobby and a business for tax purposes 2024-08-02

Tips for taxpayers who make money from a hobby 2024-07-31

Hobby or business: here’s what to know about that side hustle 2024-08-03

Here’s what taxpayers need to know about paying taxes on their hobby activities 2024-08-03

Know the difference between a hobby and a business 2024-08-03

Understanding your Form 1099-K | Internal Revenue Service 2024-08-03

Publication 525 (2023), Taxable and Nontaxable Income 2024-08-03

From Business Profit or Loss | Internal Revenue Service 2024-08-03

Publication 225 (2023), Farmer's Tax Guide | Internal Revenue Service 2024-07-30

2023 Instructions for Schedule C (2023) | Internal Revenue Service 2024-08-03