Side Hustle Taxes: When Does Your Hobby Become a Business?

It started as a passion. That thing you did on weekends or late at night to unwind. Maybe you started selling your amazing knit creations on Etsy, designing logos for a few friends, or delivering for DoorDash to make some extra cash.

It was fun. And then it got really fun when you started making actual money.

But right behind that thrill of your first few hundred dollars, a quiet, nervous little voice probably whispered in your ear… “Uh oh… what about taxes?” If you’re feeling a mix of excitement about your side hustle and a touch of dread about the financial paperwork, congratulations. You’re in the right place, and you are not alone. This guide will walk you through the most pressing question for any new entrepreneur: When does your beloved hobby officially become a business in the eyes of the IRS? And what in the world are you supposed to do about it?

Spoiler alert: it’s not as scary as you think, and getting it right is the most empowering step you can take for your growing venture.

The Big Question: Is It a Hobby or a Business?

You might think the line between a hobby and a business is determined by how much money you make. While income is a factor, the IRS is actually more interested in your intent. Are you doing this with the serious intention of making a profit, or are you just having fun and occasionally making a little cash?

To figure this out, the IRS uses a “nine-factor test.” We won’t bore you by listing them like a legal textbook. Instead, they boil down to a few common-sense questions:

Are you acting like a business? Do you have a separate bank account? Do you keep records of your income and expenses? Do you have business cards or a website? If you’re treating it like a serious operation, the IRS is likely to see it that way, too.
Are you putting in the time and effort to make it profitable? If you’re consistently working to improve your skills, market your products, or streamline your services to make a profit, that looks like a business. If you just dabble whenever you feel like it, that leans more toward a hobby.
Do you depend on the income? If the money from your side hustle is essential for paying your bills, it’s almost certainly a business.
Have you been profitable in the past? A track record of making a profit is a strong indicator of a business. The general IRS guideline is if you’ve made a profit in three of the last five years, you’re presumed to be a business.

The Bottom Line: If you’re nodding along and thinking, “Yeah, I’m really trying to make this a legitimate source of income,” then it’s time to start treating it like a business. And that comes with some serious perks.

Why You Want to Be a Business (Hint: Deductions!)

Being classified as a hobby for tax purposes is actually pretty limiting. You have to report all the income you make, but you can’t deduct any of the expenses you incurred to make it. If you sold $1,000 worth of pottery but spent $400 on clay and kiln fees, you still pay tax on the full $1,000. Ouch. But when you operate as a business, a whole new world opens up: business deductions.

This means you can subtract your business expenses from your business income to lower your taxable profit. In that same pottery scenario, as a business, you would only pay tax on the $600 profit ($1,000 income – $400 expenses). This is the single biggest reason you want to be classified as a business.

Okay, It’s a Business. Now What? Meet Self-Employment Tax.

This is the part that surprises most new side hustlers. When you’re an employee at a regular W-2 job, your employer pays half of your Social Security and Medicare taxes, and you pay the other half. When you’re self-employed, you are both the employee and the employer. That means you have to pay both halves.This is called the Self-Employment Tax, and it’s currently a flat 15.3% of your net profit.This is in addition to your regular income tax. It’s crucial to be aware of this so you can set money aside. A good rule of thumb is to save 25-30% of every payment you receive in a separate savings account specifically for taxes. It might feel like a lot, but you’ll be incredibly grateful you did when tax time rolls around.

Your New Secret Weapon: Common Side Hustle Deductions

So how do you lower that taxable profit and keep more of your hard-earned cash? By meticulously tracking every single business expense. Here are just a few examples of common deductions for side hustlers:

Supplies: The yarn for your Etsy shop, the ingredients for your baking gig, the canvases and paints for your art.
Software & Subscriptions: Your Adobe Creative Cloud subscription, website hosting fees, Canva Pro, a scheduling tool like Calendly.
Home Office Deduction: If you have a dedicated space in your home used exclusively for your business, you can deduct a portion of your rent/mortgage and utilities.
Mileage: If you’re a driver for Uber or DoorDash, or if you drive to meet clients or pick up supplies, you can deduct the business mileage on your car.
Marketing & Advertising: The cost of Facebook ads, business cards, or flyers.
Business Travel: The cost of a hotel and meals for a conference or a business-related trip.
Education: Online courses, books, or workshops that help you improve your business skills.
Bank Fees for your business account.
A portion of your cell phone and internet bills based on how much you use them for business.

Feeling a little overwhelmed by that list? Don’t be. This is where a simple system becomes your best friend.

The Easiest Way to Stay Organized (Without Expensive Software)

Before you rush into a complicated accounting program with a hefty monthly fee, know that you don’t need one to get started. All you truly need is a clear, simple way to track your income and categorize your expenses as they happen.

This is exactly why we created our 1099 Tax Deductions Tracker and Small Business Accounting Templates. They are designed for people just like you—entrepreneurs who need an affordable, easy-to-use system without the steep learning curve. You can see exactly where your money is going, know your profit at a glance, and have perfectly organized records ready for tax time. It’s the control and clarity you need for a simple one-time cost.

Your 3-Step Action Plan to Get Started Today

Feeling motivated? Here’s what you can do right now to set yourself up for success.

Open a Separate Bank Account. This is the most important step. Stop mixing your personal and business finances today. Open a free business checking account and run all your business income and expenses through it. This will make bookkeeping a thousand times easier.
Choose a Simple Tracking System. Whether it’s one of our pre-built templates or your own notebook, commit to a system. Don’t let your receipts pile up in a shoebox.
Save Every Receipt. Every. Single. One. The easiest way is to take a quick photo with your phone and save it to a dedicated folder in the cloud (like Google Drive or Dropbox).

Don’t Let Fear Hold You Back

Treating your side hustle like a business isn’t about adding stressful paperwork. It’s about respecting your own work. It’s about shifting your mindset from “just a hobby” to a legitimate, profitable venture. The confidence that comes from knowing your numbers and being in control of your finances is priceless. So go forth, pursue your passion, make that money, and know that you have the tools and knowledge to handle the business side with ease.

Disclaimer: I am not a tax professional. This blog post is for informational purposes only and should not be considered legal or financial advice. Please consult with a qualified accountant or tax professional to address your specific situation.