How Much Money Can You Make on a Hobby Before Paying Tax?

Understanding the tax implications of income-generating activities is an important aspect of financial planning for many individuals. When a recreational pursuit begins to generate revenue, it becomes necessary to determine how that income is treated for tax purposes. The distinction between a hobby and a business is a fundamental concept that carries significant tax consequences for taxpayers.

Distinguishing Between a Hobby and a Business

The Internal Revenue Service (IRS) does not provide a specific income threshold that automatically classifies an activity as a hobby or a business. Instead, the differentiation hinges on the taxpayer’s intent to make a profit from the activity. An activity is generally considered a business if its primary purpose is for income or profit, while a hobby is pursued mainly for personal enjoyment or recreation. The tax rules for businesses and hobbies vary significantly, particularly regarding expense deductions. Taxpayers should regularly reassess their activity, as a hobby can transition into a business over time if the intention to profit becomes primary.

To determine whether an activity is carried on for profit, the IRS considers a set of nine factors, with no single factor being decisive. These include:

Whether the activity is conducted in a businesslike manner, including maintaining accurate books and records.
The expertise of the taxpayer or their advisors, and whether they have prepared for the activity by studying accepted business practices.
The time and effort dedicated to the activity, especially if it lacks personal or recreational aspects.
The expectation that assets used in the activity may appreciate in value, such as land.
The taxpayer’s past success in similar or dissimilar activities.
A history of income or losses from the activity, along with the amount of occasional profits. Consistent losses might suggest a hobby, unless they are typical for a startup phase or due to unforeseen circumstances.
The financial status of the taxpayer; for example, if the activity provides a significant source of income.
The presence of elements of personal pleasure or recreation, especially if personal motives outweigh the profit motive.

Taxation of Hobby Income

All gross income derived from a hobby is taxable, regardless of the amount earned. There is no income threshold below which hobby income is exempt from taxation; even small amounts must be reported to the IRS.

Reporting requirements for hobby income can sometimes be confused with its taxability. For instance, third-party payment networks, such as those used for online sales platforms, are required to report payments to the IRS using Form 1099-K if certain thresholds are met. For tax year 2024, the threshold for issuing a Form 1099-K is $5,000, and for 2025 and subsequent years, it is $600. Receiving a Form 1099-K does not make income taxable; rather, it indicates that the IRS has been informed of the payments received.

Even if a Form 1099-K is not issued because the income falls below the reporting threshold, the income remains taxable and must be reported by the taxpayer. Hobby income is typically reported on Schedule 1 (Form 1040). This income is then subject to ordinary income tax rates, similar to wages or other forms of income.

Reporting Hobby Income and Expense Considerations

When reporting hobby income, the gross amount received must be listed on Schedule 1 (Form 1040). This direct reporting of gross income differs from how business income is handled. For tax years 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) significantly changed the treatment of hobby expenses. Under this legislation, hobby expenses are generally no longer deductible.

This means that a taxpayer must report all the income earned from their hobby, but they cannot reduce that taxable income by deducting any related expenses. For example, costs for materials, supplies, advertising, or entry fees associated with the hobby cannot be subtracted from the gross income reported. This can result in a tax liability even if the expenses incurred for the hobby exceed the income generated. The suspension of these deductions differs from pre-TCJA rules, which allowed limited deductions for hobby expenses as miscellaneous itemized deductions.

In contrast, an activity classified as a business can deduct ordinary and necessary business expenses. Business income and expenses are typically reported on Schedule C (Form 1040), where expenses directly offset income, resulting in a net profit or loss. This difference in expense treatment can lower the taxable income for a business compared to a hobby. For instance, a business can deduct costs like rent, utilities, marketing, and professional fees, which are unavailable for hobbyists.

Although hobby expenses are not deductible, maintaining accurate records of both income and expenses is still advisable. This practice provides a clear financial picture of the activity and can be helpful in case of an IRS inquiry. While the federal rules for hobby expense deductibility are clear, taxpayers should be aware that state tax laws may vary, though the general principles often align with federal guidelines.