Tax Tip 2025-42: Help to decide between a hobby or business

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Issue Number: Tax Tip 2025-42

Help to decide between a hobby or business

Hobbies and businesses are treated differently when it comes to filing taxes. The biggest difference between the two is that businesses operate to make a profit while hobbies are for pleasure or recreation.

Either way, if they are paid through payment apps for goods and services during the year, they may receive an IRS Form 1099-K for those transactions. These payments are taxable income and must be reported on federal tax returns.

There are a few other things people should consider when deciding whether their project is a hobby or business. No single thing is the deciding factor. Taxpayers should review all the factors to make the best decision.

Questions to help taxpayers decide if they have a hobby or business

• Is there an intent to make a profit?
• If the activity makes a profit, how much is it?
• Can they expect to make a future profit from the appreciation of the assets used in the activity?
• Do they depend on income from the activity for their livelihood?
• Are any losses due to circumstances beyond their control or are the losses normal for the startup phase of their type of business?
• Are operations adjusted to improve profitability?
• Is the activity carried out like a business with complete and accurate books and records kept?
• Do the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business?

Whether taxpayers have a hobby or run a business, good recordkeeping throughout the year will help when they file taxes.

More information

• What to do with Form 1099-K
• Small Business and Self-Employed Tax Center
• Publication 535, Business Expenses
• Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C)
• Publication 5558 Activities Not Engaged In For Profit Audit Technique Guide

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