Do I Have to Pay Taxes on Hobby Income?

Many individuals engage in activities they enjoy, such as crafting, selling handmade goods, or offering services like photography on the side. These pursuits can sometimes generate income beyond personal enjoyment. A common question is whether this income is taxable. Understanding the tax implications is important, as the Internal Revenue Service (IRS) categorizes income based on the activity’s nature. This distinction is important for determining reporting requirements and potential deductions.

Determining If Your Activity Is a Hobby or Business

The IRS distinguishes between a hobby and a business based on profit motive. An activity is considered a business if its primary purpose is profit, while a hobby is pursued for personal enjoyment without the intent to make money. The IRS uses nine factors to determine if an activity is carried on for profit, and no single factor is conclusive; all facts and circumstances are considered.

One factor is whether you carry on the activity in a businesslike manner, which includes maintaining accurate books and records and operating like other profitable businesses. The amount of time and effort you spend on the activity is also considered, as substantial dedication often indicates a profit motive. Your expertise or that of your advisors, and whether you seek out and apply business methods, can further support a business classification.

The IRS also examines your expectation that assets used in the activity may appreciate in value, indicating a long-term profit strategy. Your success in similar or dissimilar activities suggests a business-oriented mindset. The history of income or losses from the activity is reviewed; consistent losses might suggest a hobby, while occasional profits, especially if substantial, could point towards a business.

Your financial status and whether you depend on the income from the activity for your livelihood are also considered. If the losses from the activity are due to circumstances beyond your control, or are normal for the startup phase of a business, it may still be seen as a business. Lastly, if the activity has elements of personal recreation or enjoyment, the IRS may consider this, though it is not a sole determining factor. The IRS presumes an activity is for profit if it generated a profit in at least three out of the last five tax years, or two out of seven years for activities involving horses.

Tax Treatment of Hobby Income

Once an activity is determined to be a hobby, all gross income generated from it is taxable and must be reported on your federal income tax return. This means that if you sell items or provide services as part of your hobby, the money you receive is considered income by the IRS. This income is subject to ordinary income tax rates, similar to wages or other forms of income.

The Tax Cuts and Jobs Act (TCJA) of 2017 changed the tax treatment of hobby expenses. For tax years 2018 through 2025, miscellaneous itemized deductions subject to the 2% adjusted gross income (AGI) limit were suspended. This means individuals generally cannot deduct expenses related to their hobbies during this period.

Prior to the TCJA, hobby expenses could be deducted as miscellaneous itemized deductions, but only up to the amount of hobby income and only if a taxpayer itemized deductions. These expenses were also subject to the 2% AGI floor, meaning only the amount exceeding 2% of your AGI was deductible. Currently, however, aside from the cost of goods sold if you are selling products, virtually no other hobby expenses are deductible.

This current non-deductibility can increase a taxpayer’s tax liability, as all hobby income is fully taxable without offsetting related costs. For example, if you earn $500 from selling handcrafted items but spent $400 on materials and supplies, you would still report the full $500 as income, with no deduction for the $400 in expenses. This contrasts with a business, where expenses can generally be deducted to reduce taxable income.

Reporting Hobby Income on Your Tax Return

After determining your activity is a hobby, you will report the income on your federal tax return. Hobby income is reported on Schedule 1 (Form 1040), specifically on the “Additional Income and Adjustments to Income” section. This income is entered on the “Other income” line.

It is important to report the gross income from your hobby, meaning the total amount received before any expenses. Even if you receive a Form 1099-MISC or Form 1099-NEC for your hobby income, it should still be reported on Schedule 1 as hobby income, not on Schedule C. Schedule C, “Profit or Loss from Business (Sole Proprietorship),” is exclusively for reporting income and expenses from a business activity.

To properly report this, locate Schedule 1 (Form 1040) within your tax preparation software or physical tax forms. You will then navigate to the “Other income” section and enter the total amount of gross hobby income on the designated line. No corresponding deductions for hobby expenses should be entered elsewhere on your return, as these are generally not allowed for individuals for tax years 2018 through 2025.