Hobby or Business? The IRS Offers Guidance to Help You Decide

| Based on IRS Tax Tip 2025-42 | Issued July 2025

The IRS has issued guidance to help taxpayers make that determination, and the distinction can have a big impact on how income and expenses are reported.

Why It Matters

The core difference is profit motive:

• A business exists to earn a profit.

• A hobby is done primarily for personal enjoyment or recreation.

That difference affects what deductions you can claim, whether you file Schedule C, and how your income is taxed. Importantly, even if an activity is considered a hobby, any payments received—especially through payment apps—are taxable and must be reported on your tax return. You may receive a Form 1099-K if you accept payments through platforms like PayPal, Venmo, or Etsy.

Key Questions to Ask: Business or Hobby?

The IRS doesn’t rely on a single test. Instead, taxpayers should evaluate several factors when deciding how to classify an activity. Consider the following:

1. Is there an intent to make a profit?
   Are you actively trying to generate income?

2. Has the activity made a profit?
   If so, how much and how often?

3. Is there potential for future profit from asset appreciation?
   For example, investments in equipment or inventory.

4. Do you rely on this income for your livelihood?
   Is this a significant part of your household income?

5. Are any losses due to startup costs or uncontrollable circumstances?
   Losses in early stages may be typical for some businesses.

6. Have you made changes to improve profitability?
   Adjusting strategy or operations can show business intent.

7. Do you maintain accurate books and records?
   Organized accounting supports a business classification.

8. Do you or your advisors have the knowledge to run this as a business?
   Experience or professional support can matter.

While no single question provides a definitive answer, looking at the full picture can help support the correct classification on your tax return.

Why Recordkeeping Still Matters

Regardless of whether your activity qualifies as a business or hobby, keeping detailed records throughout the year is essential. This includes:

• Income received (even if no 1099-K is issued)

• Expenses related to the activity

• Documentation supporting your classification

Proper records help defend your tax treatment if the IRS ever inquires about the nature of your activity.

Need Help Determining How to Classify Your Activity?

I help individuals and small business owners understand their tax obligations and optimize their financial strategy. Whether you are selling your art online or launching a side business, I will help you make sure your activity is treated correctly—and tax-efficiently.