Hobby vs Business
Generally speaking, a hobby is a leisure activity that a person practices in his spare time for recreation and pleasure. In contrast, a business is a means of acquiring money that involves work. Both hobbies and business are essential for a person’s development and well-being.
Growing a business provide a sense of accomplishment and give us the means to provide for our families: food, shelter, and access to our preferred hobbies may depend on how much money we make.
Hobbies (and leisure) help to unwind and reduce stress related to workplace or family duties. They can be physical, like going hiking, or intellectual such as playing chess. In both cases, they offer a crucial break that prevents burnout and other stress-related issues.
For some people developing a business can be as excited as their favorite hobby. And for others making money from a hobby is a way of escaping the burden of work. Do a job you like, and you will not feel like working.
There are hundreds and thousands of activities to do as hobbies. Some of the most common ones involve painting, collecting coins, reading books, crafting, crocheting, knitting, and sewing. Conducting a hobby has several benefits, both for the person and for the community as a whole.
A person can draw satisfaction and enjoyment when he/she engages in something that he/she likes to do. Being happy have a very positive impact on the overall well-being of a person. A person practicing a specific hobby can make friends who have the same interests.
A community in which many people are engaged in practicing hobbies is rich and diverse in arts and culture. Other than these advantages, many people can turn their hobbies into successful businesses. In cases where hobbies are turned into successful businesses, one should check the hobby income threshold of his country.
But in that scenario, the person has no obligation of reporting to a business. Instead, people can earn from the hobby according to their convenience and will.
Now, if a person wants to convert their recreational activities into a hobby business, several points need to be kept in mind. It is because there are significant differences between a hobby and a business.
Generally speaking, a person conducts a business activity if the primary goal is to make a profit. In this way, the whole series of activities are planned and organized in a businesslike manner.
There are specific definitions that the Internal Revenue Service lays out with regards to hobbies vs. business. According to IRS, a hobby is any activity an individual pursues without the intention of making money or profit out of it.
So basically, the difference lies in the goal that forms the foundation of following a specific activity. If a person have a hobby and can make money out of it once in a while without the main intent of gaining profit from the hobby, he/she is surely conducting a hobby rather than a business.
There are several characteristics of a business identified by the Internal Revenue Service because no single factor can determine if a person is in business.
The first factor is that if a person has decided to initiate a business, he/she applies for obtaining an ABN to have a registered business name. The following important factor is the intent of the person to make a profit out of that activity, even if it is for a short period.
Other significant factors include keeping business records, maintain account books, opening and operating separate business bank accounts, obtaining relevant licenses, and carrying out activities from business premises. These are important to consider that to move from hobby to business.
Hobby income vs. self-employment
Several transitions can be made from a hobby. One of them is self-employment. Now considering hobby income vs. self-employment, there exists a fine line between the two. That line is usually defined by the revenue and customs authority in the respective country of origin.
For example, Her Majesty’s Revenue and Customs (HMRC) is a non-ministerial department of the UK Government responsible for collecting taxes, the payment of some forms of state support, and the administration of other regulatory.
The rule applied in the case of hobby vs. business is also used for hobby vs. self-employment. If a person is working intending to earn money, then it is generally considered self-employed. It is because the motive behind practicing the activity is making profits rather than just recreation.
Another way to classify an activity as self-employment is repeated actions that generate profit. Other variations of self-employment include:
- Being self-employed along with being an employee.
- Practicing a hobby and earning from it.
- Getting cash or other goods and discounts in return for goods and services.
- Making only minimal or no profits at all.
Going from hobby to business
Many people wonder how much money they need to make before their hobby becomes a business. That generally depends on the rules and regulations of the region in which you practice the hobby. Most of the time, the taxation applied on a particular product or service defines whether the activity is a hobby or a business.
It is because the laws governing taxes treat hobbies differently than businesses. Generally speaking, the money spends on a hobby is not considered a deduction. But if one starts to earn income from a hobby, the person can deduct hobbies according to the revenue generated.
These deductions are possible under some terms and conditions. For instance, if the total miscellaneous deductions don’t exceed 2% of the adjusted gross income, then that income is not eligible for a deduction at all.
These rules are different for businesses. Generally, all companies are allowed to deduct the total amount of expenses involved in doing their business. For this reason, many hobbyists who earn from their hobby prefer to declare a business.
Many people call them side hustle hobbies as well. The rules that differentiate self-employment and business from hobbies are the same for side-hustle hobbies. Conclusively, the amount of money that one needs to make before calling their hobby a business depends on the context and the location taxation rules.
Hobbies that make money
There are many activities in which people can engage for recreational purposes, and that can also lead to earning a handful of money for them. Such hobbies include writing, gardening, photography, cooking, sewing, knitting, painting, illustration, and design.
These activities vary from person to person. For instance, the hobbies that can make money for stay-at-home moms include crocheting, knitting, sewing, designing, writing, painting, and even cooking. These hobbies are suitable for stay-at-home moms because they enable them to look after their kids and engage in their favorite activity to earn some good bucks.
One such example is that of Debbi Fields, who enjoyed baking and particularly cookies. Even when she didn’t have enough to afford natural ingredients, she innovated her recipes in the comfort of her home. She is now the founder of Mrs. Fields, a dessert empire worth 450 million dollars. Debbi is a classic example of entrepreneurs who turned hobbies into million-dollar businesses.
Money-making hobbies for retirees are different from the younger employed people who have many other responsibilities. For instance, retirees who have a passion for traveling and exploring can spend time as travel guides and earn money.
Similarly, they can engage full-time in DIY and crafting ideas and do professional photography. It is because they don’t have the limitation of working from home.
There are millions of examples of hobbies that make money. Some of the real-life examples of entrepreneurs who turned hobbies into million-dollar businesses tell us that almost any activity can become a money-making hobby from home.
For example, Michael J. Kittredge, who made his first candle for his mother from crayons, now owns a successful business by the name of Yankee Candles.
Best tips to turn a hobby into a business
It is now a fact that there are several hobby business ideas that can make money. Here are several tips and tricks that one can follow to initiate a hobby that makes money.
Some of these ideas include identifying the market, being consistent, managing and using digital platforms. For instance, identifying the market is essential because some of the niches are too saturated. It is not, thus, advisable to launch a hobby business in such a market.
Whatever business a person is trying to launch, consistency and perseverance are the keys. It is because taking orders, maintaining logbooks, and managing accounts require a lot of commitment.
Time management is also critical because if a person is unable to meet deadlines, he/she will automatically lose customers and client base. Other tips to turn hobbies into business or a side hustle include being honest, following your passions, and working on your strengths.
Hobby income and Internal Revenue Service
Numerous people are now engaging in side hustle or hobbies that can earn them money. It is imperative to know about the tax regulations imposed on hobbies and business hobbies in your region.
Generally, taxpayers must report on their tax return the income earned from hobbies. The rules for writing the payment and expenses will depend on whether the activity is considered a business or a hobby.
The conditions to taxpaying are, however, different for every activity. For instance, there is no unique limitation on the amount of money that one has to make to be considered a business. If a person is engaging in an activity with the intent of making money out of it, it is considered a business, whether that person is making a profit out of it or not.
The rules for deduction govern that a taxpayer can, within limits, can usually deduct ordinary and necessary hobby expenses. An ordinary cost is one that is common and accepted for the activity. A necessary fee is one that is appropriate for doing a task.
On the other hand, for people practicing hobbies, taxpayers can only deduct hobby cost up to the amount of hobby earning. If hobby expenses exeeds its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.
To conclude, anyone can convert a hobby into a profitable business. There are, however, no limitation on how much money you can make before a hobby becomes a business. The main difference lies in the intent that forms the basis of that activity.
There are no rules on how much money one can earn from a hobby before paying taxes. If it’s a registered business, taxes have to be paid after deduction, even if they are not making any profit.