The IRS factors
The IRS looks at whether an activity is carried on with the intention of making a profit. Its list of questions:
- Is the activity carried on like a business, with complete and accurate books and records?
- Does the taxpayer put time and effort into it that show an intention to make it profitable?
- Does the taxpayer depend on income from the activity for their livelihood?
- Are losses due to circumstances beyond the taxpayer's control, such as drought or fire, or are they normal in the start-up phase?
- Has the taxpayer changed methods of operation to improve profitability?
- Do the taxpayer and advisors have the knowledge needed to carry it on as a successful business?
- Has the taxpayer made a profit in similar activities in the past?
- Does the activity make a profit in some years, and how much?
- Does the taxpayer expect to make a future profit from the appreciation of assets used in the activity?
The Taxpayer Advocate Service's 2026 tip sums up the signs of a business: organized books and records, substantial time and effort, an intention to earn a profit, relying on the activity for your livelihood, and having turned a profit in earlier years. Occasional small income with no profit usually points to a hobby.
What each answer means
| Hobby | Business | |
|---|---|---|
| Income | reported on Schedule 1, Form 1040, line 8j | reported on Schedule C |
| Expenses | not deductible: miscellaneous itemized deductions, suspended permanently | ordinary and necessary business expenses deducted on Schedule C |
| A loss | cannot offset other income | can offset other income under the rules that apply |
| Self-employment tax | not applicable | on net profit; see the self-employment tax calculator |
The same side income, both ways
| $4,000 of sales, $2,500 of costs | As a hobby | As a business |
|---|---|---|
| Income reported | $4,000 | $4,000 |
| Expenses deducted | $0 | $2,500 |
| Added to taxable income | $4,000 | $1,500 |
| Self-employment tax base | none | $1,500 net profit |
As a hobby, every dollar of sales is taxed and no cost reduces it; as a business, only the profit is taxed but self-employment tax applies to it. The guide QBI deduction explained covers a further deduction available to a business, and Form 1099-K threshold 2026 when payment platforms report the sales.
Keeping it clear
- Keep books from the start: income, costs, mileage and time, which is the first factor the IRS lists; how long to keep tax records covers how long.
- Track profitability and the changes made to improve it.
- Price your work to cover costs: the profit margin calculator helps.
- Read Publication 334 if the activity is a business, for the Schedule C rules.
This guide follows the IRS and Taxpayer Advocate pages and the CRS summary of the 2025 law. Whether a particular activity is a business depends on its facts, and this is not tax advice.
Frequently asked questions
Do I have to report hobby income?
Yes. The IRS says taxpayers who make money from a hobby must report that income, and the Taxpayer Advocate Service's March 2026 tax tip names the line: Schedule 1 of Form 1040, line 8j. You may receive a Form 1099-K for money received through payment apps or marketplaces, whether the activity is a hobby or a business.
Can I deduct hobby expenses?
No. The IRS explains that expenses for an activity not carried on for profit are miscellaneous itemized deductions and can no longer be deducted, and the Congressional Research Service notes that the 2025 tax law made the suspension of miscellaneous itemized deductions permanent. A hobby that earns $4,000 and costs $2,500 still reports the full $4,000.
Can a hobby loss reduce my other income?
No. The IRS says taxpayers who are not trying to make a profit cannot use a loss from the activity to offset other income. That is the main practical reason the hobby-or-business question matters.
How does the IRS decide if something is a business?
By looking at the facts against a set of factors: whether the activity is run like a business, the time and effort put in, whether you depend on the income, whether losses are beyond your control, changes made to improve profitability, your knowledge, past success, whether it makes a profit in some years, and whether you expect assets to appreciate. No single factor decides; the overall picture of a profit motive does.
What changes if it is a business?
Income and deductible expenses go on Schedule C, which the Taxpayer Advocate points to through IRS Publication 334, and a net profit is subject to self-employment tax. A business loss can offset other income, subject to the rules that apply to it.
Sources
- IRS: Know the difference between a hobby and a business (the factors, including whether the activity is carried on like a business, time and effort, dependence on the income, losses beyond the taxpayer's control, changes to improve profitability, knowledge, past success, profit in some years, expected appreciation; hobby income reported on Schedule 1; a hobby loss cannot offset other income)
- Taxpayer Advocate Service: Hobby vs. business income, March 2026 (hobby income on Schedule 1, Form 1040, line 8j; signs of a business such as organized books, substantial time and effort, profit intent, livelihood and past profit; Form 1099-K; Publication 334 for Schedule C)
- IRS Tax Tip: Tips for taxpayers who make money from a hobby (expenses for an activity not carried on for profit are miscellaneous itemized deductions and can no longer be deducted; hobby income must be reported)
- Congressional Research Service, Tax Provisions in P.L. 119-21, the FY2025 Reconciliation Law (the suspension of miscellaneous itemized deductions made permanent)
General information based on the sources above, not tax, legal or financial advice.