As your successful blog begins to make money, you'll soon have to grapple with this one question: Is your blogging just a hobby, or is it a legitimate business?
The answer can make a big difference in the taxes you pay from your blog income. The wrong answer causes some real IRS headaches.
So which one is it? Is it a hobby, or is it a business? The answer is it depends. If all you want to do is blog for the sake of blogging, it's more likely a hobby. Seeking a profit is a prime indicator that you're running your own business instead of a hobby.
Those are, of course, pretty simple definitions. There are some more in-depth criteria that we need to consider. How you approach your blog plays a role in whether it's a hobby or a business. We'll dive into all of that here as we talk about:
- Why does it matter if it's a business or hobby?
- How does the IRS decide if it's a hobby or a blog?
- What if the IRS disagrees with your classification?
- How to treat your blog if you want it to be a business
- How to treat your blog if you want it to be a hobby
About this article: The purpose of this article is to explain blogging as a hobby vs. as a business, particularly as it relates to U.S. tax law. This is not tax advice and should not be taken as such, but is for informational purposes only. You should seek a tax expert for advice related to your personal tax situation.
How it matters on your taxes if it's a business or hobby
The main reason it matters is the tax implications. Both designations have tax advantages.
A hobbyist pays taxes for their hobby income as “other income.” It's included with things like investment, retirement, and interest income and added to earned income for income tax purposes.
If it's a hobby, you don't pay self-employment taxes. That's a 15.3% tax savings. The flip side is you cannot write off expenses. You pay taxes on your net income, not your profit.
Operating as a business flips everything. The government sees it as you being self-employed. You pay not only income tax on your earnings but also Social Security and Medicare (known as self-employment taxes).
However, as a business, you pay taxes on profits or what's left over after expenses. That allows you to deduct blog-related expenses.
You may pay a higher tax rate as a business because of self-employment tax. However, the taxable amount may be lower because of the additional write-offs.
How does the IRS decide if it's a hobby or a blog?
The thing to remember here is that the Internal Revenue Service doesn't want this to be about which has the better tax advantage. It is more of a question of how you treat it.
Simply put, the IRS boils it down to two questions:
- Are you acting like a hobbyist or a business owner?
- Is your blogging profitable?
A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. People operate a business intending to make a profit. Many people engage in hobby activities that turn into a source of income. However, determining if that hobby has grown into a business can be confusing.IRS News Release: Here's how to tell the difference between a hobby and a business for tax purposes.
The IRS has several factors that determine whether you're involved in a hobby or a business. They all fit into the two questions above. We'll look at the nine factors:
1. The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records.
Are you doing business activities along with your blog? Activities like bookkeeping, tracking performance, and outreach points to a business operation.
2. The taxpayer puts time and effort into the activity to show they intend to make it profitable.
Here's a great way to look at it: How did your money-making opportunity come about? Did someone approach you with an offer? Or did you seek out the opportunities?
If you're reaching out to sponsors, affiliates, or things like that, that will fall on the business side.
3. The taxpayer depends on income from the activity for their livelihood.
These days, it's fair to say you depend on any and all money that comes in, no matter the source. But the idea here is the more you rely on the money you make, the more it points to being a business.
4. The taxpayer has personal motives for carrying out the activity, such as general enjoyment or relaxation.
Why are you blogging? Is the general enjoyment or relaxation enough that you would be fine continuing regardless of income? Does money become a part of the reason?
5. The taxpayer has enough income from other sources to fund the activity
Are you paying the costs of doing this out of disposable income that you got from somewhere else? Or is the goal for your blog to be self-sufficient? If you have enough money to fund your activity personally and without relying on income from your blog, that can be evidence of a hobby.
6. Losses are due to circumstances beyond the taxpayer's control or are normal for the startup phase of their type of business.
Loss is often a part of operating a business. Was the loss related to the business itself? Is this a matter of trying to write off some expenses to incur a loss, or is the loss a natural part of starting your business? Are you operating at a loss because it just takes time before the money comes in, but you still have expenses?
7. There is a change to methods of operation to improve profitability.
What's the motivation for how you do things? Are you changing the layout of your blog because you think it looks better? Or are you updating posts for SEO purposes so you can get more traffic and more earning potential?
If you're adjusting how you do things so it might make more money or improve the bottom line, there's a good chance it's a business.
8. Taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.
Many of us may lean more towards a hobby with this question. We may be making money, but we never really thought of this as a business.
However, the fact that you're looking into this information indicates that you're seeking that ability and knowledge.
Much of this question relates to the motivation for doing this. Was this planned with the intent of making money?
9. The taxpayer was successful in making a profit in similar activities in the past.
Say you had a profitable blog previously. You decided to try and repeat that success. That kind of thing indicates this is a business over a hobby.
10. Activity makes a profit in some years and how much profit it makes.
If you have yet to earn a profit for at least three out of five years, there's a high probability that the IRS will determine that this is a hobby.
Several of the above factors appear as though the IRS intends to identify those who operate a business. However, this one goes in a different direction.
You can't call a hobby a business just to write off the related expenses. That's what this facto seems to focus on.
11. Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity
Have you seen what some blogs can sell for?
There's an important point here: Your blog is not a business. It's a part of your business. Your blog is a tool that helps you grow and operate your business.
Your business is the work you do with your blog to make money.
Blogs can often sell for several years worth of the money they bring in. That makes the blog an asset that can create a future profit.
How do you weigh all of these?
Many bloggers may find that some questions point to hobby status and others point to business. At that point, you need to balance the factors against one another and determine which outcome seems strongest.
Most of us probably don't need to weigh these. You get a pretty good idea reading through these factors. The more that money and profit (either now or long term) are part of the picture, the more that this is a business. The less you care about the money to the point that all you want to do is work on your blog, the more that this is a hobby.
What if the IRS disagrees with your classification?
You'll need to decide: Is your blog a business or a hobby? Once you choose, you need to act accordingly.
Some call it a hobby when it's really a business. They do so to dodge self-employment tax. Others call it a business so they can write off their hobbies.
If the IRS were to audit you, they could look at all the factors above and decide that your hobby blog was indeed a business or vice versa.
If you claimed a business and they said it was just a hobby, the IRS can disallow any expenses you've written off. That would mean your taxable income was higher, and you'd be liable for taxes on that additional income.
However, if you claimed it was a hobby, and they decided it's really a business, they can come back and say that you're liable for self-employment taxes for your blog income.
Either way, you could be looking at additional costs, including back taxes, penalties, and interest. That's why this is such an important thing to get right.
How to treat your blog if you want it to be a business
If you've decided that you are running a blogging business, the main thing here is to treat it like a business. You want to make it clear that the intent is to be a business and to be profitable. Here are some thoughts that come from the IRS factors listed above.
1. Create a plan.
It doesn't need to be a formal business plan (though it doesn't hurt if it is). If you have something written out about what you're planning to do, what sources of revenue you expect to find, and the action steps you can take to be profitable, that can be good documentation that you intend to run a business.
2. Keep records.
Use an expense tracking program, a spreadsheet, or even a written ledger. List all of your expenses and all of your income. The more you do the things that businesses do (like bookkeeping), the more the IRS believes you're a business.
3. Think about a business structure.
Look into getting an EIN (Employer Identification Number) at the very least. Check into whether an LLC or some form of a corporation makes sense for your blogging business.
4. Get a bank account for your business transactions.
Having separate bank accounts for business and personal activities is an excellent practice. Keep business and personal financial transactions separate from one another. If you're just starting out and aren't making money yet to cover your expenses, make deposits personally into your business account as an owner's investment rather than paying for hosting and other expenses out of your personal accounts.
5. Be profitable.
I know that that's easier said than done, especially in the first year or two of a blog. The IRS is looking for profits three out of five years. If you're not sure you'll be profitable by the third year, consider not claiming expenses until you start making money.
How to treat your blog if you want it to be a hobby
If you want to maintain hobby status, be sure your blogging looks like (and actually IS) a hobby.
1. When someone approaches you with money-making opportunities, document that they approached you. Avoid the impression that you sought out business opportunities.
2. Make sure that financial transactions are personal and don't look like a business deal. You pay all costs out of pocket from personal accounts.
3. Avoid using anything that looks like a business name. Any activity that appears as though you have a business indicates you are operating one.
4. Don't seek out ways to grow your income or increase profits. Avoid advertising or active outreach. Avoid activity (such as social media presence) that appears to be branding for your blog.
Additional Questions about Business vs. Hobby for Bloggers:
We'll cover some common questions that I see related to this topic that may or may not have been specifically covered above:
At what point does a hobby blog become a business?
Your blogging moves from being a hobby to a business the moment that monetization of the blog plays a role in how you do things. Your blogging becomes a business when profit motivates your work or influences how you operate.
Pat Flynn tells the story of how his first online business was really an accident. He set up a blog to organize notes so he could study for an architectural certification. Pat soon found that others were coming to his site (often hundreds per day) because they found it on Google. He hadn't really intended to make it a public site at all, and now he was getting visitors left and right.
He began to experiment with Adsense and other revenue. That was the moment that he moved from hobby to business status.
That happens to a lot of us. For new bloggers, it's often a hobby, but somewhere along the line, we realize that the traffic we're getting can become an income source. That's usually when we transition to being a business.
How much can you make on a hobby blog before it becomes a business?
The IRS doesn't have a set amount. Hobby income is reported on Schedule 1 of your IRS tax form, and significant amounts of hobby income listed year after year could get auditors' attention.
How much can you make as a hobby blogger before you have to pay taxes?
You must report any hobby income on Schedule 1 of your tax return. There is no minimum amount.
If any business pays you $600 or more, they will send you a 1099 reporting that income for your blog. At that point, the IRS knows about your income, and failure to report it would be unwise. Do not make the mistake of thinking that income less than $600 does not have to be reported.
Do you have to pay taxes on a hobby business?
All income from your hobby is taxable. However, there's no such thing as a “hobby business.” The term is an oxymoron. It's either a hobby or it's a business. If you treat it as a business with any profit motive, it is no longer a hobby and must be treated as a business.
Do I need to register my hobby as a business?
If it's an actual hobby, no. You report hobby income as other income on your 1040 tax return. Some municipalities may require a business license for any revenue-generating effort.
Where do I write off my hobby expenses?
You can't. As of the 2018 tax year, the Tax Cuts and Jobs Act has eliminated the deduction for hobby expenses. Before that, hobbyists could write off a portion as an itemized deduction.
Can my blog be a business even if I have a day job?
Absolutely. It's very possible to operate a side business regardless of whether you have a full-time job or if blogging is the only thing you do. What matters more is how you treat your work as a blogger.