There’s no single test that determines whether an activity is a hobby or a business, but the IRS considers several factors, including:
- Whether you intend to make a profit
- Whether you rely on the income
- Whether incurred losses are expected for a new business or are unusual
- Whether the activity is run in a businesslike manner, with complete and accurate records
- Whether you have the expertise to succeed or consult someone who does
- Whether the assets used in the activity are expected to increase in value
- Whether you make changes to improve profitability
However, if you intend to earn a profit, the IRS will likely consider your work a business — a hobby is pursued primarily for pleasure or recreation.
Why it matters
No matter what kind of work you do, all income must be reported on your tax return.
If your activity is considered a hobby, you’ll report income and limited deductions on your personal return. If your work is a business, you may be required to file a separate business return and will follow different rules for claiming deductions.
If you receive payments through a third-party app such as PayPal, Venmo or Square for goods or services and if those payments meet IRS reporting thresholds, the platform is required to send you a Form 1099-K. If you don’t receive the form, it’s still your responsibility to keep accurate records and report the income correctly.
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