Does the IRS automatically consider my side hustle a business if I make money from it?

No. Earning income doesn't automatically make an activity a business. The IRS evaluates profit intent using nine factors, including how businesslike your operations are, your expertise, and your history of profits or losses. Income alone doesn't settle the question—but consistent profits over three of five years creates a favorable presumption in your favor.

What happens if the IRS reclassifies my business as a hobby?

You lose the ability to deduct any business expenses against that income. Under current tax law (post-2017), hobby expenses are no longer deductible even as miscellaneous itemized deductions, but the income remains fully taxable. This can result in a significantly higher tax bill, plus potential interest and penalties if prior returns are adjusted.

Do I need to register my side hustle as an LLC in Indiana?

Not necessarily. A sole proprietorship requires no formal registration in Indiana and is the default structure for most side hustles. However, registering an LLC through INBiz can provide liability protection and, at higher income levels, an S-corp tax election can reduce self-employment taxes. Your CPA at Warrior can help you decide which structure fits your situation.

When do I need to start paying quarterly estimated taxes on side-hustle income?

Generally, you should make quarterly estimated tax payments if you expect to owe at least $1,000 in federal tax for the year after subtracting withholding and credits. Indiana has a similar threshold for state estimated payments. The four federal due dates typically fall in April, June, September, and January. Missing them can trigger underpayment penalties.

Do I have to collect Indiana sales tax on products I sell from home?

If you sell taxable tangible goods in Indiana—whether at a craft fair, a home studio, or online—you generally need a Registered Retail Merchant Certificate and must collect Indiana's 7% sales tax. Some online marketplaces like Etsy collect and remit sales tax on your behalf for Indiana sales as marketplace facilitators, but you should verify your specific obligations with your CPA at Warrior.

When Does a Side Hustle Become a Business? | Warrior Busines

You started selling handmade candles on Etsy, picked up a few freelance design clients, or started flipping furniture on Facebook Marketplace. It felt casual at first. But now money is coming in regularly, and you're wondering: is this still a hobby, or have I accidentally started a business? The answer matters far more than most people realize—and the IRS has very specific opinions about it.

How Does the IRS Decide Whether Your Activity Is a Business or a Hobby?

The IRS applies a "profit motive" test: if you are engaged in an activity with a genuine intention to make a profit, it is a business. The agency evaluates nine factors—including how you run the activity, your time investment, your expertise, and your history of income or losses—rather than using a single bright-line rule.^[1]

Tracking business income and expenses for hobby versus business determination Fort Wayne CPA

There is, however, a helpful safe-harbor presumption baked into the tax code: if your activity produces a profit in at least three of the last five consecutive tax years (two of seven for horse breeding or racing), the IRS presumes it is a business.^[2] Flipping that presumption requires the IRS to prove otherwise—a much harder bar for them to clear.

The nine IRS factors include:

Whether you carry on the activity in a businesslike manner (separate bank account, records, contracts)
The time and effort you put in
Whether you depend on income from the activity
Your history of income or losses
Whether losses are due to circumstances beyond your control or are normal startup costs
Whether you or your advisors have the expertise to carry on the activity successfully
Your success in carrying on similar activities in the past
The activity's history of income and losses
The amount of occasional profits, if any

No single factor is decisive. The IRS looks at the full picture—which means you should too.

Why Does the Hobby vs. Business Distinction Matter for Your Taxes?

A business can deduct ordinary and necessary expenses against its income; a hobby cannot. Since the Tax Cuts and Jobs Act of 2017, hobby expenses are no longer deductible at all as miscellaneous itemized deductions—yet hobby income is still fully taxable.^[3] That asymmetry can create a surprisingly large tax bill.

Tax planning documents for side hustle business formation Fort Wayne Indiana accountant

Consider a concrete example: you earn $8,000 selling woodworking pieces and spend $6,000 on tools, lumber, and a booth at the Fort Wayne Home & Garden Show. If the IRS classifies your activity as a hobby, you owe income tax on the full $8,000 with zero deduction for those costs. If it's a business, you report only $2,000 of net profit—and potentially reduce that further with other legitimate deductions.

Running a legitimate business also means you owe self-employment (SE) tax—currently 15.3% on net earnings up to the Social Security wage base—in addition to ordinary income tax.^[4] That stings, but it also means you're building Social Security credits toward future retirement and disability benefits, and you can deduct half of the SE tax paid on your Form 1040.^[5]

What Steps Should You Take Once You Decide You're Running a Business?

Once you've crossed into business territory, a handful of practical steps protect you legally, build credibility with the IRS, and set you up to actually keep more of what you earn.

Choose a Business Structure

Most side hustles start as sole proprietorships by default—no paperwork required in Indiana. Income and expenses flow directly to Schedule C on your personal return. But depending on your income level and liability exposure, an LLC or S-corp election may save you meaningfully on SE taxes. Indiana LLCs are registered through INBiz, the state's one-stop business portal.^[6] Our team at Warrior can run the numbers on whether an S-corp election makes sense for your situation.

Open a Separate Bank Account

This single step does more for your IRS credibility than almost anything else. Commingled personal and business funds are a red flag in an audit and make bookkeeping a nightmare. A dedicated business checking account—even a free one—draws a clear line.

Track Every Dollar In and Out

Good records are the backbone of every deductible expense. Mileage, materials, software subscriptions, a portion of your cell phone bill—all potentially deductible, all requiring documentation. If your books are already a mess, our cleanup and catch-up bookkeeping service can get you back to a clean slate fast.

Pay Quarterly Estimated Taxes

When no employer is withholding taxes from your side-hustle income, you are responsible for making estimated tax payments four times a year. Missing those payments triggers underpayment penalties.^[7] Indiana also requires estimated payments for state income tax through INTIME, the Indiana Department of Revenue's online portal.^[8]

Register for Any Required Indiana Licenses or Taxes

If you sell taxable goods or certain services in Indiana, you need a Registered Retail Merchant Certificate and must collect and remit Indiana sales tax (currently 7%).^[9] This requirement applies whether you sell at a craft fair in Fort Wayne or through an online marketplace. Some platforms (like Etsy or Amazon) collect marketplace facilitator sales tax on your behalf for Indiana sales, but you should confirm your obligations with your CPA at Warrior.

What Records Should You Keep to Prove Business Intent?

Documentation is your best defense if the IRS ever questions your profit motive. Keep records that demonstrate you operate in a businesslike manner—because that is one of the nine factors the IRS explicitly weighs.

A separate business bank account and credit card
A simple business plan or written goals (even a one-pager)
Receipts for every business expense, stored digitally
A mileage log for business travel
Contracts or invoices sent to clients or customers
Evidence of professional development—courses, trade magazines, association memberships
Year-over-year financial records showing your efforts to improve profitability

If you're unsure whether your record-keeping is strong enough, our business advisory team can do a quick operational review before you file.

When Is the Right Time to Bring in a CPA?

The right time is before you make structural decisions—not after the IRS has already labeled your activity a hobby. Many Fort Wayne-area side hustlers wait until tax season to think about these questions, at which point some planning windows have already closed. A conversation with your CPA at Warrior early in the year can help you choose the right entity, set up a clean accounting system, calculate your estimated payments, and document profit intent—all before it becomes a crisis.

The line between a hobby and a business isn't always obvious, but the financial consequences of landing on the wrong side of it are very real. Getting clarity now is far cheaper than fixing it later.

Sources

Publication 535, Business Expenses: Hobby or Business? Internal Revenue Service. 2024. https://www.irs.gov/publications/p535
IRC § 183 – Activities Not Engaged in for Profit (Hobby Loss Rules). U.S. Code, Title 26. https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section183
Tax Cuts and Jobs Act of 2017 – Elimination of Miscellaneous Itemized Deductions. IRS Tax Reform Guidance. https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-a-comparison-for-businesses
Self-Employment Tax (Social Security and Medicare Taxes). Internal Revenue Service. 2024. https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes
Publication 334, Tax Guide for Small Business – Deduction for One-Half of Self-Employment Tax. Internal Revenue Service. 2024. https://www.irs.gov/publications/p334
Start a Business in Indiana. INBiz – Indiana Secretary of State. https://inbiz.in.gov
Estimated Taxes. Internal Revenue Service. 2024. https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
INTIME – Indiana Taxpayer Information Management Engine. Indiana Department of Revenue. https://intime.dor.in.gov
Sales Tax – Indiana Registered Retail Merchant Certificate. Indiana Department of Revenue. https://www.in.gov/dor/business-tax/sales-tax/

Written by

Warrior Business Services

Warrior Business Services is a boutique CPA firm in downtown Fort Wayne, Indiana, advising family-owned businesses and growth-minded owners across Northeast Indiana.

When Does a Side Hustle Become a Business?