Hobby Income Tax Guide

Hobby income is income, too. And just like any other income, the IRS wants its cut.

Table of Contents

How much can you earn from a hobby before paying tax?

Your first dollar of income from your hobby is potentially taxable. There is no minimum amount of hobby income to be taxed on it.

However, you may not have to pay tax if your total income isn’t high enough for you to owe taxes.

Do you always need to file a tax return for hobby income?

The usual tax filing thresholds apply to whether you need to declare hobby income. If your total income, including hobby income, is above the threshold, you need to file a Form 1040. Hobby income is other income that you report on Schedule 1, line 8.

The threshold is usually equal to the standard deduction. If you have self-employment income, you may need to file a tax return if you make as little as $400

What’s the tax rate on hobby income?

Hobby income is ordinary income subject to your normal income tax rate based on your tax bracket. That’s 10%, 12%, 22%, 24%, 32%, 35%, or 37%.

Do you pay self-employment taxes on hobby income?

Hobby income is not earned income. Social Security and Medicare (self-employment) taxes only apply to earned income.

Do you need to declare hobby income on state taxes?

State tax rules often follow the IRS, but they may vary. If your state has an income tax, you’ll need to check the specific rules for your state.

Can you deduct hobby expenses on your tax return?

Since 2018, there are no deductions for hobby expenses. You must include all hobby income in your taxable income even if your hobby expenses were greater than your hobby income.

For tax years through 2017 before the Tax Cuts and Jobs Act, you could only deduct hobby expenses up to your hobby income. That allowed you to offset what you made but not to get a deduction against other income. This was as a miscellaneous itemized deduction subject to a floor of 2% of your adjusted gross income.

Can you contribute to a retirement account based on hobby income?

Hobby income is not earned income. Retirement accounts only allow contributions from earned income.

If you do have earned income, there is nothing stopping you from putting the extra money into a retirement account, but your contribution limits would be based solely on your earned income.

Hobby income does count towards the AGI limit for a Roth or traditional IRA. This means your hobby income can make you ineligible to use an IRA or take deductions if your total income is too high.

How does the IRS decide if you’re a business versus a hobby?

The general test for determining whether an activity is a business or a hobby is the hobby loss rule. The hobby loss rule says that if you lose money in three out of five years, you’re presumed to be a hobby. If you make money in three out of five years, you’re presumed to be a business.

Common examples are hobby artists and hobby photographers who work primarily for fun but do sell some of their work to offset their expenses. Whether they’re actually engaged in a hobby depends on whether they’re making a profit and whether their overall conduct is more similar to hobby or business activities.

Are there exceptions to the hobby loss rule?

The hobby loss rule is just a presumption. You can safely follow it in most cases. You can also take the opposite position that you’re engaged in a hobby activity when you’re presumed to be a business or vice versa. The IRS can also do the same, although they will usually follow the hobby loss rule.

One example of an exception is where you just started a business. Even some big tech companies like Amazon took years to make a profit. If you can demonstrate that you’re attempting to grow a profitable business, you can avoid the IRS saying you’re a hobby.

An example of where you might want to stay a hobby is when you make a very small profit each year that isn’t a reasonable income for the amount of time you put in. The IRS will usually accept this type of argument if you can show how much time you spend on your hobby.

How do you show that you’re a business or a hobby?

Other than whether you’re making a profit, the IRS looks at a number of factors to decide if you’re a business or a hobby. These include whether:

  • You depend on the income you receive
  • You’re doing it for fun
  • Your profits are in line with the time and effort you’re spending on the activity
  • You keep books and records like a business
  • You’re trying to improve your profits

Can you get audited over whether you’re a business or hobby?

The IRS does a lot of business versus hobby audits. One of the reasons for the current rules was wealthy racehorse owners would spend far more than their winnings on their racing hobby but declare it as a business to get favorable tax treatment and take a loss against their other income. The IRS does not want to subsidize a hobby activity like a sport or recreation as a business loss.

  • If you’re a legitimate small business that’s losing money early on, there’s a good chance you could get audited, but that in no way means you will lose. The IRS will just want to see how you’re operating as a business and trying to grow into profitability.
  • If you think you’ve found a good way to turn your hobby into a tax deduction, you should probably think twice. The IRS may add a penalty and interest if they find you misclassified your hobby as a business.
  • If you have what could be a legitimate business but are taking excessive deductions, you could get turned into a hobby. A common example of this is sports officials who try to do some games during a family vacation and then try to claim all of their travel expenses as a business expense. Again, you need to show how what you’re doing is designed for efficient profit.

Can you switch between a business and a hobby?

It is possible for a hobby to turn into a business or a business to turn into a hobby. Maybe people liked your art so much you started regularly selling it at craft fairs. Or you realized selling your art was no fun and not profitable enough as an activity for your livelihood, so you went back to doing it as a hobby.

You have to consider each year whether you’re a business or a hobby. If the IRS thinks you should have changed how you classify your activity, they might audit you. Similarly, if you haven’t really changed what you’re doing but are trying to game your tax situation, the IRS might audit that. You have to honestly assess your situation and keep records of everything.

What about hobby selling?

There is no such thing as hobby selling under the tax code. Hobby selling usually refers to buying and selling things as part of a hobby. It would follow the above rules.

If all you’re doing is buying and selling while making a steady income, you’re probably a business. If you are an artist and sell your paintings for a small amount to offset your expenses but not earn a reasonable income, this would likely fall under hobby income.

Buying and selling collectibles falls under a third set of rules. Collectibles get treated like selling stocks and other assets. If you sell them for more than you paid for them, you may have a taxable capital gain. If you sell items at a loss, you may have a capital loss to offset your gains.

Are there any benefits of being a business instead of a hobby?

It could actually be better to be a business instead of a hobby even if you’re paying taxes on your profits. First, you’re getting your deductions back, so you may pay less in total taxes. Second, your income will count towards your Social Security earnings record and increase your benefits in retirement. Finally, you may be eligible to contribute additional money into a self-employed retirement account.

Remember, this can all vary based on your tax situation. Be sure to seek out personalized tax advice from a tax preparation expert if you aren’t sure what to do.

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Frequently Asked Questions

What’s the hobby income tax rate?

The hobby tax rate is the same as your ordinary income tax rate.

How much money can you make on a hobby before paying tax?

If you sell things as part of your hobby, you need to pay taxes on your first dollar of income.

Do I have to pay taxes on hobby income?

It depends on your total tax situation. For example, if you’re retired and have no other taxable income, your hobby income might be too small to get you over the standard deduction.

Can I earn money from a hobby without paying tax?

You generally need to pay taxes on the money you earn. Also, if your intent is to earn money, you may be a business.

How much money can you make before a hobby becomes a business?

The general rule is that if you make a profit (after expenses) in three out of five years you become a business, but there are exceptions.

Is hobby income earned income?

Hobby income isn’t earned income. This means you can’t use hobby income to claim the Earned Income Tax Credit or to qualify to contribute to a tax-advantaged retirement account.

What are the taxes for hobby selling?

There’s no such thing as “hobby selling.” Incidental sales related to a hobby may be classified as hobby income. More frequent selling may mean you’re actually a business.

How much hobby income can I make?

There is no official limit on hobby income. However, the more you make, the more likely it may be you’re a business instead of a hobby.

Is hobby income subject to SE tax?

Hobby income is not subject to self-employment tax. This is another reason why the IRS takes a close look at whether you’re actually a business or a hobby.

Do I have to pay taxes on crafts I sell?

Yes, you will generally need to pay taxes on crafts you sell.

Do I need to register my hobby as a business?

You don’t have to register a hobby business for federal tax purposes. State or local rules may require you to register especially if you’re doing something that can impact people’s health like selling food.

Is hobby income reported on Schedule C?

Hobby income is reported as other income on Form 1040. Schedule C is only for business income.

What should you do if you get a 1099-K for hobby income?

A 1099-K doesn’t make your income business income. If it’s hobby income, report it as hobby income. Keep your records in case the IRS wants you to prove it was hobby income.

Is my online store a hobby or a business?

Your online store is a business if you’re buying and selling things for profit. If you use an online store platform, like eBay or Square, to get rid of hobby items or other personal items, that usually wouldn’t make you a business.