For some it is hard to determine, so let's define the terms before we get started;
1. a person's regular occupation, profession, or trade.
2. the practice of making one's living by engaging in commerce.
1. an activity done regularly in one's leisure time for pleasure.
Hobby vs. Business. For tax purposes, in layman's terms;
A hobby is defined as an activity that you engage in “not to make a profit.” Even if you earn occasional income from doing such an activity, the primary purpose must be something other than making a profit.
A business is defined as an activity that you engage in with "intent to make profit." Even if you do not earn income from doing such an activity, the intent to make profit is there.
As per the IRS website;
The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby.
Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit & a hobby is an activity not engaged for profit.
In order to make this determination, taxpayers should consider the following factors:
Does the time and effort put into the activity indicate an intention to make a profit?
Does the taxpayer depend on income from the activity?
If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
Has the taxpayer changed methods of operation to improve profitability?
Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
Has the taxpayer made a profit in similar activities in the past?
Does the activity make a profit in some years?
Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity
The IRS will presume that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year. You can visit the IRS website @ www.irs.gov and www.irs.com
With technology advancements and an abundant access to free world wide social/public advertising there are several people utilizing it, however there is a flip side. The IRS also has additional access to your business/hobby, hence some if not all of your sales.
Also be mindful of those who may not like competition, may have a grudge or simply have nothing better to do with their time. They may contact the IRS to provide detailed information about you/your business/hobby, including but not limited to your PUBLIC social media.
One thing you don't want to do is withhold income from the IRS if/when you are required to report.
I by no means am an expert but I've heard Al Capone's story. He had done several illegal things in his life, but what got him locked behind bars was tax evasion.
Again I am not an expert, nor am I affiliated with the IRS, SBA or SBDC. I've simply done general research to hopefully clear up some confusion.
Once you determine your status; Business or Hobby, there are other things you will need to think about & keep track of.
I'll have a few more blogs in regards to those coming soon!