Hobby Income Tax Calculator
Calculation Summary
Estimated Federal Tax:
Estimated State Tax:
Total Tax Due:
Net Profit After Tax:
*Note: Under current TCJA rules, hobby expenses are generally not deductible for federal tax purposes.
Understanding Hobby Income Tax Rules
Turning a passion project into a side stream of revenue is a common goal for many, but the tax implications can be surprising. Unlike a formal business, the IRS classifies certain activities as hobbies. While hobbyists don't have to pay self-employment tax, they are also restricted from deducting expenses under the current Tax Cuts and Jobs Act (TCJA).
Hobby vs. Business: How the IRS Decides
The primary distinction between a hobby and a business is the intent to make a profit. The IRS typically considers an activity a business if it has produced a profit in at least three of the last five years. However, they also look at several other factors:
- Whether you carry out the activity in a businesslike manner.
- Whether the time and effort spent indicate an intention to make it profitable.
- Whether you depend on the income for your livelihood.
- Whether your losses are due to circumstances beyond your control.
Taxation on Hobby Income
If your activity is classified as a hobby, you must report the gross income on your tax return. This is typically done on Schedule 1 of Form 1040, line 8j.
Between 2018 and 2025, the TCJA suspended "miscellaneous itemized deductions," which previously allowed hobbyists to deduct expenses up to the amount of their income. This means that currently, you are taxed on the total revenue you receive, without subtracting the cost of materials, tools, or shipping.
Example Calculation
Scenario: Jane sells handmade pottery as a hobby. In 2023, she earned $4,000 from sales. She spent $1,500 on clay and kiln firing. Jane is in the 22% federal tax bracket and lives in a state with a 5% income tax rate.
- Taxable Amount: $4,000 (Expenses are not deductible)
- Federal Tax (22%): $880
- State Tax (5%): $200
- Total Tax Liability: $1,080
- Actual "Take Home" After Expenses and Tax: $1,420
Key Differences from Self-Employment
The silver lining for hobbyists is the absence of the Self-Employment Tax. Business owners must pay 15.3% for Social Security and Medicare on their net earnings. Hobbyists avoid this specific tax, which often offsets the lack of expense deductions for those with low overhead costs.
Tips for Hobbyists
- Keep Impeccable Records: Even if you can't deduct expenses now, tax laws change. Also, if you ever transition to a business, you'll need those records for your starting basis.
- Monitor Your Income: If you receive more than $600 through payment processors like PayPal or Venmo, you may receive a 1099-K. Ensure this matches what you report.
- Consult a Professional: If your hobby starts making significant money, talk to a CPA about whether converting to a business structure (like an LLC) would provide better tax benefits through expense deductions.