How to Calculate and Report Your Hobby Income

Engaging in personal interests often brings joy and fulfillment, and sometimes these activities can unexpectedly generate income. Whether it is selling handmade crafts, winning prize money, or earning small fees for casual services, any money received from activities primarily pursued for pleasure can be considered hobby income. Accounting for this income is important for personal financial management and fulfilling tax obligations. This guide explains what hobby income is and how to properly report it on a federal tax return.

Understanding Hobby Income

The Internal Revenue Service (IRS) defines hobby income as earnings from an activity not primarily undertaken to make a profit. The distinction between a hobby and a business is important because it affects how income is taxed and if expenses can be deducted.

The IRS uses several factors to determine if an activity is a hobby or a business. These factors include whether you carry on the activity in a businesslike manner, the amount of time and effort you put into it, and whether you depend on the income for your livelihood. The IRS also considers your history of income and losses from the activity, your success in other similar activities, and whether you have changed methods to improve profitability.

An activity is presumed to be for profit if it has generated a profit in at least three out of the last five tax years. For activities involving horses, this presumption applies if there’s a profit in at least two out of the last seven years. If an activity is classified as a hobby, any income earned from it must be reported on your tax return. However, expenses related to a hobby are not deductible against that income for tax years 2018 through 2025.

Identifying and Tracking Hobby Income

Accurately identifying and tracking all income sources from a hobby is an important step before reporting it. This involves systematically recording every instance money is received. Common examples of hobby income include sales of handmade items at craft fairs or online, contest winnings, prize money from competitions, or small fees for casual services like photography for friends or minor repairs.

Meticulous record-keeping helps ensure that all taxable income is accounted for when preparing your tax return. You can use a simple spreadsheet, a dedicated notebook, or even a separate bank account for hobby-related transactions to keep these records organized.

Each entry in your records should include the date the income was received, the source of the income (e.g., “craft sale at local market,” “online sale,” “contest prize”), and the exact amount of money received. Maintaining these clear and consistent records simplifies the process of totaling your gross hobby income at tax time.

Reporting Hobby Income on Your Tax Return

Once you have meticulously identified and totaled all your hobby income, the next step is to report it on your federal tax return. Hobby income is reported on Form 1040, U.S. Individual Income Tax Return. Specifically, it is entered on Schedule 1, Additional Income and Adjustments to Income.

You will find a line designated for “Other Income” on Schedule 1, typically Line 8. This is where the total amount of gross hobby income you have tracked should be entered.

This means the entire gross amount of hobby income you earned is subject to income tax. Taxpayers are responsible for maintaining their own records to accurately determine the total amount to report on Schedule 1. Transferring the sum from your personal records directly to Line 8 of Schedule 1 on Form 1040 completes the reporting process for hobby income.