How do I deduct craft making expenses with earnings reported on a 1099-misc? Where do I put those expenses in the 1040? This is not my career but a side enterprise.

[Patrice · Accepted solution]

The answer depends on whether you make crafts with the primary intention to make money, or if you basically make crafts for enjoyment. 

If you make crafts to make money (ie: you have a profit motive), you report your income and expenses on Schedule C. If you have profit of over $400, you must also complete Schedule SE and pay the resultant self-employment tax in addition to income tax. If you have a loss, the loss is deductible against any other income you may have. 

If you make crafts primarily for fun, your crafting is an activity not entered into for profit. Your crafting income and expenses are treated under what are commonly called "hobby income" rules. In that case your gross earnings are entered on Line 21 (other income) of your 1040. You can claim your crafting expenses only up to the amount of your craft making income, and only if you itemize deductions on a Schedule A. Even then, it must be as a 2% miscellaneous itemized deduction. Hobby income, though, is not subject to self employment tax.