So you made something.

Somebody liked it.

Then somebody said, “Wait...can I buy one?”

And just like that, what started as something you did forfun is bringing in a little money.

Congratulations!

But before we start calling you CEO, ordering business cardsand putting “Entrepreneur” in the Instagram bio, we need to answer oneimportant question:

Do you actually havea business...or do you have a hobby that makes money?

Because believe it or not, there is a difference.

And even moreimportantly, the IRS cares about that difference.

Now before you see “IRS” and immediately close this tab,stay with me.

This is actually much easier to understand than it sounds.

First, What’s the Difference Between a Hobby and a Business?

At the most basic level, the difference comes down tointent.

A hobby is generally something you do primarily forenjoyment, recreation or pleasure.

A business is operated with the intention of making aprofit.

Simple enough, right?

But here’s wherethings get interesting: making money doesn’t automatically turn your hobby intoa business.

Maybe you love baking and occasionally sell a birthday caketo somebody from work.

Maybe photography is your thing and a friend pays you totake graduation pictures.

Maybe you make custom T-shirts because you genuinely enjoyit, and every once in a while somebody asks you to make one for them.

You can make money from something and still have a hobby.

On the other hand, maybe those cake orders have turned intoweekly customers. You created pricing, started advertising, track yourexpenses, buy supplies specifically for orders and are actively trying to makea profit.

Okay nowwwww.

We might be entering business territory.

The IRS doesn’t use one single factor to decide whether anactivity is a hobby or a business. Instead, it looks at the full picture.

Why Does the IRS Care?

Because hobbies and businesses are treated differently fortax purposes.

And if there’s one thing we know about the IRS...

They would like toknow about the money.

Whether something is a hobby or a business affects howincome and expenses are treated on your tax return.

And here’s something especially important:

Calling something ahobby doesn’t mean you get to pretend the income never happened.

If you’re earning taxable income from your activity, yougenerally still have to report it.

So when that payment app starts dinging because people arebuying those cakes, shirts, candles, photographs or whatever else you’ve beencreating, don’t assume the IRS says, “Oh that’s just their little hobby, don’tworry about it.”

No friend.

The money still matters.

So How Do You Know If You’re Running a Business?

The IRS considers several factors, and no single oneautomatically determines the answer.

Instead of memorizing a long list of tax rules, ask yourselfa few practical questions.

1. Are You Actually Trying to Make Money?

Not:

Would it be nice if Imade some money?

I mean, are you intentionally trying to make the activityprofitable?

Are you thinking about what things cost? Are you settingprices based on more than what “sounds good”? Are you trying to increase sales?Are you changing things that aren’t working? Are you actually building towardprofitability?

There’s a difference between someone occasionally offeringyou money for something you enjoy doing and you intentionally creating a way toconsistently make money from it.

2. Are You Treating It Like a Business?

This one is huge.

Are you keeping accurate records? Do you know how much moneyis coming in? Do you know how much money is going out? Are you tracking yourexpenses? Do you have systems? Are you marketing or promoting what you offer?Are you making decisions based on what’s best for the operation?

Basically:

If you want it to beconsidered a business, are you actually treating it like one?

Because we can’t say, “This is my BUSINESS!” when it’s timeto post the logo...

...and then suddenly, “Oh, this little thing?” when it’stime to keep financial records.

3. Are You Putting Real Time and Effort Into Making It Profitable?

Businesses require intention.

That doesn’t mean you have to quit your job and work on yourbusiness 40 hours a week.

Plenty of legitimate businesses start as side hustles.

But are you consistently putting time into growing yours?

Maybe you’re researching your market. Improving yourproduct. Finding customers. Learning your industry. Testing different prices.Building relationships. Creating better systems.

The IRS considers whether the time and effort you’re puttinginto an activity shows that you’re actually trying to make a profit.

4. What Happens When Something Isn’t Working?

This may be one of the easiest ways to distinguish between ahobby mindset and a business mindset.

With a hobby, if something isn’t working, you might simplykeep doing it because...

you like doing it.

And that’s perfectly fine!

Everything in your life does not need to become a revenuestream.

Please enjoysomething.

But businesses have to pay attention to what’s workingfinancially.

If you’re losing money, do you change your pricing? Find acheaper supplier? Change your marketing? Adjust your product? Learn a newskill? Ask somebody with more experience for help?

Making adjustments to improve profitability is one of thethings the IRS considers when looking at whether an activity is truly beingoperated like a business.

And No, Your Business Doesn’t Have to Be Profitable Immediately

This part is important, especially for new entrepreneurs.

Losing money does notautomatically mean you don’t have a real business.

Whew.

Because if businesses had to be profitable immediately, awhole lot of companies would be in trouble.

Starting something costs money.

You may have equipment to purchase, inventory to buy,professional services to pay for, marketing expenses, software, licensing,packaging and about 37 other expenses you didn’t know existed until youstarted.

The IRS recognizes that losses can happen during the startupphase of a business and also considers whether losses resulted fromcircumstances outside your control.

Again, it’s about the whole picture.

Are you operatingwith the genuine intention of making a profit?

That’s the bigger question.

Take the Hobby-or-Business Test

Okay, let’s make this easy.

Ask yourself:

• Am I intentionally trying to make a profit?

• Do I keep accurate records of my income and expenses?

• Am I consistently putting time and effort into making thisprofitable?

• Do I adjust when something isn’t working?

• Am I learning the industry or getting advice from people whounderstand it?

• Am I operating this like something I expect to grow?

If you’re reading those questions thinking...

Well dang. I mightactually have a business.

Then it may be time to start treating it like one.

Your Hobby Becoming a Business Is a GOOD Thing

I don’t want this article to scare you into thinking themoment somebody gives you $20, the IRS is hiding behind a bush watching you.

That’s not the point.

The point is torecognize when something you’re doing casually has started becoming somethingmore.

A lot of businesses start exactly this way.

You bake because you love baking.

You cut hair because you’re good at it.

You make candles because it’s relaxing.

You take pictures because you have an eye for it.

You fix cars because you’ve been doing it forever.

Then people start asking you to do it for them.

Then they start paying you.

Then they start referring other people.

And eventually you have to decide:

Is this something Ijust enjoy doing...or is there actually a business here?

If the answer is business, don’t panic.

That’s exciting.

Now it’s time to learn what comes next.

Get organized. Keep good records. Understand your numbers.Learn your industry. And start treating your business like the business youwant it to become.

You don’t have to know every tax rule, business structure orfinancial term today.

You just have torecognize when it’s time to stop treating your business like a hobby.

And once you know?

You can execute.

Official resource: IRS - Is that activity just a hobby or a business?

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