Is Your Side Hustle a Business or a Hobby?

Whether you sell crafts online, create content, or turn a favorite pastime into extra income, it's important to understand how the IRS views your activity.

Many people assume that because they're making money, they automatically qualify as a business. Unfortunately, that's not always the case.

Why It Matters

If the IRS determines your activity is a hobby instead of a business, you still have to report the income—but you generally cannot deduct the related expenses.

That can lead to paying tax on income without receiving the tax benefits many business owners expect.

How the IRS Decides

The IRS looks at the overall facts and circumstances of your activity rather than relying on a single factor. Some of the things they consider include:

  • Do you operate in a businesslike manner?

  • Do you keep accurate books and records?

  • Do you advertise or market your services?

  • Are you investing time and effort into making the activity profitable?

  • Do you have the knowledge or seek professional advice to improve profitability?

  • Have you earned a profit in previous years?

No single factor determines the outcome, but demonstrating a genuine profit motive is important.

Best Practices

If you're operating a side business, consider these simple steps:

  • Maintain a separate business bank account.

  • Keep detailed income and expense records.

  • Save receipts and supporting documentation.

  • Create a business plan.

  • Review your pricing and operations regularly.

  • Work toward generating consistent profits.

These practices not only help your business run more efficiently but can also strengthen your position if the IRS ever questions your activity.

Thinking About Starting a Side Business?

Many taxpayers are turning hobbies into successful businesses, but establishing the right recordkeeping and tax practices from the beginning can save significant headaches later.

If you're unsure whether your activity qualifies as a business or have questions about deducting expenses, we're happy to help you evaluate your situation before filing your tax return.

Need guidance? Contact Sherman, Kelly & Associates, P.C. to discuss your business and tax planning needs.