As tax season approaches, one of the most common conversations we hear buzzing about the maker community is how to account for your art and craft sales when reporting to the government. It’s an age old debate: is this a business, or is it a hobby?
The true answer lies perhaps more on a spectrum or in a grey area, especially as the term “side hustle” continues to grow in popularity. Many makers pursue their craft alongside a more traditional job, and for many that in itself is enough to determine that the craft is a hobby rather than a business. For others, though, that side hustle has been started with the intention (or hope) that it will one day grow enough to supersede the traditional job and become one’s true full-time paycheck pursuit. Sometimes hobbies grow unexpectedly and become businesses right before your eyes. With each individual defining their maker status in different ways, it can be difficult to come to a hard-and-fast distinction between hobby and business.
Generally speaking, though, a common consensus is that a maker who practices their craft for recreation, without the intention of making a profit, is a hobbyist. They may sell their works and wares at the end of the day, but often the intention is simply to cover their costs, or even just to clear out space for future creations.
Maker business, on the other hand, tends to focus on the goal of turning a profit. You may still be doing it because you love it, but explicitly attempting to make a paycheck beyond the cost of production tends to become the dividing line where your craft crosses from hobby to business.
But even these loose definitions are not a universal answer. Fortunately for tax preparation, the IRS has actually created a set of guidelines for determining whether your maker sales constitute proceeds of a hobby or income from a business. They, too, generalize around the idea of making a profit, but then include a series of factors that may help confirm your business status.
Some factors that may constitute a business-level of activity:
- Maintaining accounting books and sales records
- Dependence on income as part of or primary in your livelihood
- Business acumen, either personal or from your advisory network
- Past successes in similar activities
- Appreciation of assets leading to future profits
Even if you do determine that your activity is a hobby rather than a business, definitely visit the IRS page anyway. They shed some light on allowable hobby deductions – because let’s be honest, this is the most important part of preparing your taxes!
