The dictionary states that a “hobby is an activity done regularly in one’s time for pleasure“. So, doing puzzles could be considered a hobby. Restoring an old car could be considered a hobby too. But what if your hobby is something that turns into a sale, is it still a hobby? If your hobby allowed you to earn more than $400 in a calendar year, you’re encouraged to file a return and report it as self-employed income on your taxes.
Another definition of a hobby is “any activity that a person pursues because they enjoy it and have no intention of making a profit“. So then, when does a hobby become a business? Ask yourself these questions to determine whether your hobby is just that, or if it has become a business:
- Does the time and effort you put into the activity indicate that you desire to make it profitable?
- Are you keeping complete and accurate books and records?
- Are you depending on the income generated from your hobby to sustain your livelihood?
- Is your regular day time job starting to suffer as your attention and focus shifts to what you’re working on at home – your hobby?
The obvious signs of a hobby converting into a business, is when you need to start carrying inventory, purchase additional equipment, possibly hire a part time worker, open a business checking account, create your online presence, needing larger premises away from home to carry on workflow, and ultimately, walking away from the secure comfort of a regular paycheck, because your hobby is now able to sustain financial commitments commensurate with survival.
A word of caution and wisdom to you if you’re an avid hobbyist and you’re starting to make a small profit:
- You’re going to need to keep an accurate book of accounts, and records.
- You’ll need to file taxes.
- You’ll need to register your business, and depending on the laws in your State, you might not be able to continue working out of your home.
In conclusion, if you have a hobby, and you love doing what you do in your spare time, and you’re not generating profitable income from it, have at it. If you’re on the cusp of turning your hobby into a profitable income generating mechanism, strongly consider crossing the divide into entrepreneurship, along with all of the bells and whistles that come with the transition.