This post is part of a 9-part series called “Turn Your Side Hustle Into a Tax-Saving Business.”
In this series, you'll learn how to legally lower your taxes, take advantage of IRS rules, and treat your side hustle like a real business.
Why This Question Matters
Before you claim business tax deductions or file as self-employed, the IRS wants to know:
Are you running a business — or just doing a hobby?
This question is important because:
A real business can deduct expenses, reduce taxes, and build wealth.
A hobby? Not so much. Hobby expenses are limited and not deductible like business expenses.
So let’s get clear.
IRS Section 183: The "Hobby Loss Rule"
Section 183 of the Internal Revenue Code sets the rules for when an activity counts as a business.
To qualify as a business, you must be engaged in the activity to make a profit — not just for fun or personal satisfaction.
If your side hustle doesn’t show a profit motive, the IRS may deny your business deductions.
The 9-Factor Test
The IRS uses 9 questions to figure out if your activity is really a business:
Do you run it like a business?
(Track income, expenses, have a business account, etc.)Do you have the knowledge or hire experts to help?
Do you put in time and effort to make it profitable?
Have you made money doing this or similar things before?
Do you make a profit in some years?
(The IRS likes to see a profit in 3 of the last 5 years.)Do you expect your assets to grow in value?
(For example, flipping property or building brand equity.)Do you adjust your methods to improve results?
Do you depend on the income from this activity?
Is it mostly personal or recreational?
(If it feels like a hobby, it probably is.)
You don’t need to pass all 9, but the more that point to profit, the stronger your case.
Examples
| Activity | Likely a Hobby | Likely a Business |
|---|---|---|
| Selling art occasionally | ✅ | |
| Running a regular Etsy shop | ✅ | |
| Driving for Uber part-time | ✅ | |
| Writing as a passion project | ✅ | |
| Freelance writing for pay | ✅ |
How to Strengthen Your Case
If you want your side hustle treated as a business, here are 5 simple steps to take now:
Open a separate business bank account
Track income and expenses with a spreadsheet or software
Write down a simple business plan
Save receipts and documentation
File a Schedule C if you’re a sole proprietor
These small moves help prove that you're in it to make a profit—and that means you may qualify for real deductions under Section 162 (covered in Post 2!).
What Happens If the IRS Says It’s a Hobby?
If your activity is considered a hobby:
You can’t deduct business expenses
You may owe more in taxes
The IRS could go back and deny past deductions
So it’s worth getting this right.
Final Thoughts
If you're putting in real time, effort, and care to grow your side hustle — and your goal is to make a profit — then chances are, you’re running a business.
And that means:
You may qualify for valuable deductions
You can start reducing your tax bill
You’re ready for the next step in this series!
Ready to learn what you can actually deduct now that you're a business owner?
👉 Check out Post 2: What You Can Deduct as a Business (Section 162)