Hobby income is never earned income.
Self-employment income is earned income. In order to be considered self-employed, the person must be “engaged in an ongoing trade or business.“ To be engaged in an ongoing trade or business means that you perform the activity regularly, with the expectation of earning a profit, that you advertise and promote your business and take other steps that a regular business takes in order to remain profitable. A hobby is something that is done mainly for personal pleasure, with no particular regularity or expectation of profit, even though a profit may occasionally be made.
If you are engaged in a hobby, you still must report taxable income if you make money. You are not allowed to deduct your expenses, but you are not subject to the additional 15% tax for self-employment. If you are engaged in a business, you are allowed to deduct your ordinary and necessary business expenses from your gross income to reduce your taxable profit, but you must also pay the additional 15% self-employment tax.
A hobby is not considered income earned from working and it’s not eligible for the earned income credit. Additionally, if a person has $3000 or more of unearned income (which includes hobbies, lottery prizes and investments) then they are disqualified from EIC even if they have income earned from working a W-2 job.
So a person with hobby income might be ineligible for EIC because they do not have enough earned income (earned from working) or because or because they have too much unearned income.
If you leave off the hobby income in order for a W-2 job to qualify a person for EIC, that is tax fraud. Likewise, reporting hobby income as if it was self-employment income in order to qualify for EIC is also tax fraud. If the person is audited, they could face repayment of the EIC with interest and penalties and an automatic two-year ban from further EIC.
