Is My Hobby Really a Business?

The questions the IRS uses to decide whether your side job unlocks deductions — or doesn’t.

Key takeaways

• The IRS looks at your overall pattern — not just whether you made money.
• Once your activity qualifies as a business, taxes and reporting requirements change
• Tracking expenses and understanding deductions can keep more of your side income in your pocket

I started baking because I loved it. At first it was just friends and family asking for my iced lemon loaf. Then their friends started asking — and making special requests. Before long, I was earning a few hundred dollars at a time.

It felt like fun money — especially since I already had a full-time job.

But then I had to ask myself if I needed to pay taxes on this and if so, is this still just a hobby or officially a side hustle?

That’s the question many people don’t think about until tax season. And the answer may surprise you.

At tax time, the operative question isn’t whether you planned to start a business, but whether your profit motive may have created one.

The idea — called a profit move — is one way the IRS decides whether what you’re doing is a hobby or a business. Understanding that is what makes the line much clearer.

Why your profit motive is the deciding factor

The IRS doesn’t decide based on how official your setup looks or whether you’ve registered a business name. What matters most is intent.

If you’re trying to make a profit, that changes everything.

When your activity qualifies as a business, you can generally deduct ordinary and necessary expenses — which lower your taxable income.

If your activity is considered a hobby under IRS rules, but you usually can’t deduct related expenses.

The money you can earn might look the same, but the tax outcome can be very different.

How your activity is evaluated

There isn’t just one rule that flips a hobby into a business. The IRS looks at the overall picture to understand whether you’re genuinely trying to make a profit.

Think of it as a pattern test, not a checklist. 

Here’s what the IRS considers:

• How you operate: Do you track income and expenses? Maintain records? Treat it in an organized, businesslike way?
• Your expertise: Do you have relevant knowledge — or seek out advice — to improve profitability?
• Time and effort: Are you putting in enough time and work with the goal of making money?
• Potential for growth: Could the assets you’re using (equipment, property, inventory) reasonably increase in value?
• Track record: Have you turned similar ventures  into profitable ones before?
• Income and losses over time: Do profits eventually show up, or do the losses make sense for the startup phase?
• Scale of profit: When you do earn money, is it meaningful relative to your time and investment?
• Financial status: Do you depend on this income — or is it minor compared to other earnings?
• Personal enjoyment: Is this primarily something you do for fun, or does it operate like a business?

You don’t need to meet every requirement. The IRS looks at the overall pattern to decide whether you’re operating with a true profit motive.

What changes after you’re considered a business

When an activity is considered a business, a few things typically emerge for you:

●  Net income becomes subject to self-employment tax

●  You need to make quarterly estimated tax payments

●  Expenses become critical for reducing your tax liability  

This is usually when it occurs to you that the rules aren’t the same anymore—even though what you’re doing doesn’t feel any different.

Use deductions to keep more of what you earn

The biggest mistake isn’t making money from something you enjoy; it’s leaving deductions on the table once that income becomes consistent.

When you don’t track expenses — or assume the amounts are too small to matter — you end up paying tax on money you never really kept. Supplies, equipment, software, mileage, and even part of your phone bill expense can add up faster than you expect.

That’s how side income gets smaller than it should be.

Take control of your side hustle as it evolves

Determining whether your side income is treated as a hobby or business isn’t always obvious — especially when it starts small. But the distinction matters once money becomes consistent. 

TurboTax asks the same types of questions the IRS uses to evaluate whether an activity is a hobby or a business, helping you understand where your side income likely falls — and what that means for deductions and estimated taxes.

Instead of relying on assumptions of social media advice, you get guidance grounded in actual tax rules. That clarity helps you plan ahead, reduce surprises, and keep more of what you earn.When side hustle gets serious, TurboTax Premium helps you find every deduction you deserve.