Defining Hobby vs. Business

If you’re like many crafty folks these days, you may have considered leveraging sites like Etsy or Facebook to sell your handmade creations online. With just a few clicks, you can share your designs worldwide and potentially turn your creative passion into extra income! However, as an accounting firm working with small businesses and solopreneurs, we always get questions about how selling handmade goods online impacts your taxes. The key factor is whether the IRS sees it as a hobby or a business.

Let’s break it down!

The IRS makes a clear distinction between hobbies and businesses for tax purposes. A hobby is defined as an activity you do without intending to make a profit. Just for fun on the side! A business, on the other hand, is an activity you conduct with the genuine intention of earning income.

So what does this mean for your Etsy shop or handmade Facebook business page?

Reporting Hobby Income

If the IRS classifies it as a hobby, you do need to report the income on your tax return. But you typically can’t deduct any expenses related to the hobby—you can only deduct up to the amount you earned. Bummer!

Now, if your handmade shop qualifies as a legit business, you report the income AND can deduct related expenses like materials, advertising, website fees, etc. Way better! But you need proper records to back up these write-offs.

“Well how the heck does the IRS actually decide if my handmade gig is a hobby or business?”

Learn more about TSAT’s Trusted Solutions!

Great question! Some factors they consider:

• Do you conduct it in a professional, business-like way?
• Is it your main source of income?
• Do you spend considerable time on it?
• Do you depend on the income for your living expenses?
• Have you had losses for multiple years?
• Do you have expertise in the particular craft or art?

Seeking TRUSTED Help

If you’re unsure whether your specific handmade sales qualify as a business, we always recommend consulting a TRUSTED ADVISORS (like us!). TSAT is your TRUSTED ADVISOR and accounting solution, we can evaluate your situation and ensure you comply with IRS rules. With proper planning, you may be able to structure your shop so it’s viewed as a business—which makes filing and deductions much easier.

The bottom line is with just a little effort, you can turn your passion into profits! But make sure you understand the tax implications first. The IRS can be a real spoilsport if you don’t follow the rules.

Give us a shout if you want help reporting your handmade income properly and maximizing deductions. We’ll make sure your taxes don’t get messy so you can keep creating!