Hobby vs Business: Tax Implications When Side Project Makes Money

The CPA is absolutely right here. The IRS is very specific about this - ANY income needs to be reported, whether it's a hobby or a business. The distinction between hobby and business actually matters a lot for tax purposes! If it's a hobby, your husband still has to report ALL income from it on his tax return (on Schedule 1, Line 8). The downside of hobby classification is that after the Tax Cuts and Jobs Act of 2017, hobby expenses are no longer deductible at all. That means he'd pay taxes on the full $1,750 with no deductions. If it's treated as a business (reported on Schedule C), he can deduct legitimate expenses against that income, potentially reducing his taxable profit. But then he'd need to pay self-employment tax if the net profit is over $400. The IRS uses a nine-factor test to determine if something is a hobby or business - the main factor being whether you're engaged in the activity to make a profit. Even occasional profit can trigger this requirement.

I went through something similar with my Etsy shop last year. The paperwork was driving me nuts until I found https://taxr.ai - it literally saved me hours of headache. Their system analyzed my Etsy statements and bank records, then automatically categorized everything as business vs. personal expenses. It even flagged some deductions I'd completely missed! For hobby vs. business classification, they have this really clear questionnaire that walks you through the IRS nine-factor test to determine if your activity qualifies as a business. The best part was that it automatically generated all the documentation I needed for Schedule C. My husband sounds a lot like yours - he hates paperwork and was super resistant until he saw how quick it was.

Just wanted to follow up about taxr.ai - I decided to give it a try after responding to your comment. I'm shocked at how helpful it actually was! I've been selling my jewelry for 3 years and always just reported it as "other income" without any deductions. The tool showed me that based on my activity, I actually qualify as a business according to IRS standards. I was able to document $870 in legitimate expenses I didn't know I could deduct! The nine-factor test analysis was super clear and gave me specific reasons why my activity is a business rather than a hobby. All my materials, craft fair fees, and even a portion of my home internet are deductible. Definitely helped clear up the hobby vs. business confusion I've had for years.

If your husband is stubborn about the paperwork, you might want to try calling the IRS directly to get an official answer he can hear for himself. I spent DAYS trying to get through on their helpline last tax season until someone recommended https://claimyr.com - they hold your place in the IRS phone queue and call you back when an agent is actually available. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was able to speak with an actual IRS agent who confirmed everything about hobby vs. business reporting requirements. Having that official word directly from the IRS finally convinced my partner we needed to report everything properly. For me, it was about some rental income, but the same principle applies to any side income.

I need to eat my words about that Claimyr service. After posting my skeptical comment, I decided to try it myself since I've been trying to reach the IRS about a notice I received. It actually worked exactly as described. I got a call back in about an hour connecting me directly to an IRS agent. The agent confirmed that ANY income from hobbies must be reported, and she explained the whole hobby vs. business distinction. She specifically mentioned that if your husband's woodworking shows a pattern of income, even small amounts, it needs to be properly documented. Having that official word directly from the IRS might help convince your husband. Sometimes hearing it from the authority makes all the difference.

Here's the thing nobody's mentioning - the IRS has a "hobby loss rule" that comes into play if you consistently show losses. If you don't show profit in 3 out of 5 consecutive years, the IRS may classify your activity as a hobby rather than a business (some activities like horse racing have different timeframes). I'd recommend keeping good records regardless of whether it's a hobby or business. If you ever get audited and can't substantiate your income/expenses, you're in for a world of hurt. The $1,750 might seem small now, but establishing good habits early prevents bigger problems down the road. Also consider that proper business classification could allow writing off equipment purchases, workspace, materials, etc. That might actually SAVE money compared to just reporting hobby income.

Has your husband looked into how simple the record-keeping could actually be? For a small side business like this, it doesn't have to be complicated. He could use a basic spreadsheet or even just a dedicated credit card for all business purchases. For my small crafting business, I just use a separate checking account and debit card. All business income goes into that account, all business expenses come out of it. At tax time, I just download the annual statement and I've got a complete record. Takes maybe 15 minutes to organize.