Hobby Income Tax Calculator
How Hobby Income Tax Works
If you earn money from a side activity that isn't considered a formal business by the IRS, it is classified as hobby income. Unlike a business, where you can deduct expenses to lower your taxable income, the Tax Cuts and Jobs Act (TCJA) of 2017 fundamentally changed how hobbies are treated.
Is Your Activity a Hobby or a Business?
The IRS uses nine factors to determine if your activity is for-profit (a business) or for sport/recreation (a hobby). Key factors include:
- Whether you carry out the activity in a businesslike manner.
- Whether the time and effort spent indicate an intention to make a profit.
- Whether you depend on the income for your livelihood.
- Whether you have made a profit in at least three of the last five years.
Example Calculation
Suppose you enjoy woodworking as a hobby and sold several custom birdhouses this year for a total of $3,000. You spent $1,200 on lumber and tools.
Because it is a hobby, you cannot subtract the $1,200 in costs. If your marginal tax bracket is 22%, you would owe $660 in federal taxes ($3,000 x 0.22). If this were a business, you would only pay tax on the $1,800 profit.
Reporting Your Income
Even if you don't receive a Form 1099-K or 1099-NEC, you are legally required to report all hobby income. This income is added to your other earnings (like W-2 wages) and taxed at your ordinary income tax rate. It is not subject to self-employment tax (Social Security and Medicare), which is one small silver lining compared to business income.