Is Your Activity a Hobby or a Business? Understanding the Difference
Determining whether an activity qualifies as a business or a hobby can be tricky — and it can have a big impact on tax treatment. The IRS looks closely at intent of profitability to decide which category fits best.
Hobby vs. Business — what’s the difference?
According to the IRS, a hobby is an activity you pursue primarily for enjoyment, without the intent to make a profit. Business, on the other hand, is operated with a clear expectation of earning a profit.
When evaluating whether your activity is a business or a hobby, consider these questions:
- Is the activity carried out in a businesslike manner, with accurate and up‑to‑date record‑keeping?
- Is there a genuine profit motive, or is it primarily for personal satisfaction or relaxation?
- Has the activity earned a profit in at least three of the past five years? (While businesses may experience early losses, consistent, large losses may raise an IRS red flag.)
- Have you made changes to improve profitability, such as adjusting operations or marketing strategies?
Tax implications to keep in mind
The IRS treats hobby and business income differently:
- Hobby income must be reported, but related expenses are not deductible.
- Hobby income is not subject to self‑employment tax (Social Security and Medicare), but it still counts toward your taxable income.
Common examples of hobbies (per IRS guidance):
- Crafting (knitting, crocheting, sewing)
- YouTube or other content creation
- Cooking and baking
- Horse racing
Protect yourself and strengthen your position as a business:
- Maintain accurate records and clean books.
- Create a written business plan that demonstrates intent to earn a profit.
- Establish a formal entity structure (LLC, corporation, etc.).
- Keep a separate bank account for business transactions.
For help determining which category your activity falls under, please reach out to your trusted advisor at HD Growth Partners.