Hobby vs. Business: How to Tell the Difference

June 30, 2025

Hobby vs. Business: How to Tell the Difference

June 30, 2025

Hobby vs. Business: How to Tell the Difference
(And Why It Matters)

On June 24, 2025, the IRS released Tax Tip 202542, a timely reminder that if you receive money (even via payment apps) for a hobby or side gig, you need to report it and it might actually be considered a business if you're operating with profit intent https://www.irs.gov/newsroom/help-to-decide-between-a-hobby-or-business

For growing companies and even for side-business ventures, knowing where you fall on that hobby to business line can save you from tax trouble and unlock valuable deductions.

This is an image showing the difference between a hobby and an office for business.

📌 Why It Matters

Hobbies: Report income, but you can’t deduct expenses there are no deductions through 2025 per the Tax Cuts and Jobs Act. This is a change from the old rule where expenses could be deducted up to the extent of hobby income.
Businesses: File on Schedule C; you can deduct legitimate expenses, depreciate assets, and may owe self employment tax.

The line is thin and it matters. Misclassification can lead to missed deductions or audit red flags.

✅ The 9 IRS Profit Motive Factors

The IRS lists nine factors to help decide if something is a business or a hobby. No single factor decides your status it’s the total picture.

Clear intent to make a profit
History of profitability
Future profits from asset appreciation
Dependence on income for livelihood
Losses due to startup or external causes
Adjusting operations to improve profit
Businesslike record-keeping and organization
Relevant knowledge or expert consultation
Similar successful activities in the past

🛠 How to Apply This to Your Side Gig or Growing Venture

A. Be Intentional About Intent
Set a profit goal, document your plans, and track progress. Haphazard activity looks like hobby.

B. Keep Good Books
Use separate business accounts, track income and expenses, log mileage, and save receipts.

C. Adjust to Improve Profitability
Did a product not sell? Streamline it, active adjustments show business behavior.

D. Learn or Ask for Help
Consult professionals, take online courses, join industry groups this demonstrates a business attitude.

E. Watch the Safe Harbor
If you earn a profit at least 3 of the last 5 years, the IRS presumptively deems you a business (2 of 7 years for horses). However, since hobby expenses are no longer deductible, the safe harbor may be difficult to rely on b itself).

💬 Reader Question

“We run a side consulting project on weekends and got a 1099K via PayPal. We’ve never turned a big profit yet, is that a business?”

You’re on the right track by asking! Receiving a 1099-K already starts the IRS clock. Even if early profits are small, your intent, record-keeping, and effort can tip the scale toward business. Let’s look at the nine factors together.

(Share your story on our social media and we may include it here next time!)

✅ What You Should Do This Year

Analyze your side activity using the nine factors.
If it qualifies as a business, switch to Schedule C reporting, with clean accounts and records.
Even as a hobby, you must report payments received.
Consult a tax professional before year-end to optimize your tax setup.

🧠 Bottom Line from Tim Freese

“Earning income isn’t what defines a business, it's your purpose and practices. Make your side venture intentional, organized, and growth focused, treat it like a business, and it can be one.”
— Tim Freese, CPA