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Bluepeace123
Level 2

Difference in Hobby vs. Self Employed Income

What is the tax difference in reporting income made from a hobby versus income from self employment/business?

2 Best answer

Accepted Solutions
TaxandtheCurious
Employee Tax Expert

Difference in Hobby vs. Self Employed Income

Hello again, Thank you for clarifying you question! 

 

For hobbies - If your activity is classified as a hobby, you will have to report any income you make from that hobby on your personal tax return, Form 1040, on Schedule 1, line 8, “Other Income.” This income would be subject to income tax, depending on your tax bracket. 

 

Federal Marginal Rates for Single filers and Married Jointly: For tax year 2022, the top tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly).

The other rates are:
35%, for incomes over $215,950 ($431,900 for married couples filing jointly);
32% for incomes over $170,050 ($340,100 for married couples filing jointly);
24% for incomes over $89,075 ($178,150 for married couples filing jointly);
22% for incomes over $41,775 ($83,550 for married couples filing jointly);
12% for incomes over $10,275 ($20,550 for married couples filing jointly).
The lowest rate is 10% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).

 

Self-Employment income - is subject to both income tax and also self-employment tax of 15.3%. The 15.3% is a Federal "self-employment" tax. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).  Yes, this must be paid and this is in addition to income tax.  Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. However, you figure self-employment tax (SE tax) yourself using Schedule SE (Form 1040 or 1040-SR). Also, you can deduct the employer-equivalent portion of your SE tax in figuring your adjusted gross income. Wage earners cannot deduct Social Security and Medicare taxes.

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Opus 17
Level 15

Difference in Hobby vs. Self Employed Income


@Bluepeace123  wrote:

That's not exactly what I was asking.  I apologize for not being clearer.  How much does the IRS tax a person for income made from a hobby vs. the amount a person is taxed on profit from self employment?  Thanks


It's complicated.

With a hobby, you pay income tax on your income.  You are not allowed to deduct expenses, such as travel, booth rental, listing fees, credit card fees, shipping, tools, home office, and so on.  (I have seen different opinions on whether you can deduct the cost of materials.)

 

With a business, you pay income tax plus 15% self-employment tax, but only on your net income after subtracting all your costs, including costs for materials, inventory, selling fees, shipping, tools, and so on.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

View solution in original post

4 Replies
TaxandtheCurious
Employee Tax Expert

Difference in Hobby vs. Self Employed Income

First, ask yourself if your hobby is a recreational pursuit or a profit-making endeavor.  The IRS defines a hobby as an activity that a person purses because they enjoy it and have no intention of making a profit. 

 

Here are 4 Tips for Money Making Hobbies that should help clarify in greater detail: https://turbotax.intuit.com/tax-tips/self-employment-taxes/4-tax-tips-for-money-making-hobbies/L89qz... 

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Bluepeace123
Level 2

Difference in Hobby vs. Self Employed Income

That's not exactly what I was asking.  I apologize for not being clearer.  How much does the IRS tax a person for income made from a hobby vs. the amount a person is taxed on profit from self employment?  Thanks

TaxandtheCurious
Employee Tax Expert

Difference in Hobby vs. Self Employed Income

Hello again, Thank you for clarifying you question! 

 

For hobbies - If your activity is classified as a hobby, you will have to report any income you make from that hobby on your personal tax return, Form 1040, on Schedule 1, line 8, “Other Income.” This income would be subject to income tax, depending on your tax bracket. 

 

Federal Marginal Rates for Single filers and Married Jointly: For tax year 2022, the top tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly).

The other rates are:
35%, for incomes over $215,950 ($431,900 for married couples filing jointly);
32% for incomes over $170,050 ($340,100 for married couples filing jointly);
24% for incomes over $89,075 ($178,150 for married couples filing jointly);
22% for incomes over $41,775 ($83,550 for married couples filing jointly);
12% for incomes over $10,275 ($20,550 for married couples filing jointly).
The lowest rate is 10% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).

 

Self-Employment income - is subject to both income tax and also self-employment tax of 15.3%. The 15.3% is a Federal "self-employment" tax. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).  Yes, this must be paid and this is in addition to income tax.  Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. However, you figure self-employment tax (SE tax) yourself using Schedule SE (Form 1040 or 1040-SR). Also, you can deduct the employer-equivalent portion of your SE tax in figuring your adjusted gross income. Wage earners cannot deduct Social Security and Medicare taxes.

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
Opus 17
Level 15

Difference in Hobby vs. Self Employed Income


@Bluepeace123  wrote:

That's not exactly what I was asking.  I apologize for not being clearer.  How much does the IRS tax a person for income made from a hobby vs. the amount a person is taxed on profit from self employment?  Thanks


It's complicated.

With a hobby, you pay income tax on your income.  You are not allowed to deduct expenses, such as travel, booth rental, listing fees, credit card fees, shipping, tools, home office, and so on.  (I have seen different opinions on whether you can deduct the cost of materials.)

 

With a business, you pay income tax plus 15% self-employment tax, but only on your net income after subtracting all your costs, including costs for materials, inventory, selling fees, shipping, tools, and so on.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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