Hobby or business? When side income becomes self-employment (US, UK, Canada)

You design, write, make or fix things on the side, and people have started paying you. At some point that stops being a hobby and becomes a business you report as self-employment. Here's how the IRS, HMRC and the CRA each tell the two apart, what changes for income, expenses and losses, and what records to keep either way.

General information, not tax or legal advice. Not written or reviewed by a lawyer or an accountant. The short answer, the signs table, the side-by-side summary, the steps, the checklist and all the wording are ours; the official items come from the US, UK and Canadian government pages linked below. There is no single bright line in any of the three countries: each agency looks at all the facts, and none of these rules is a freelance law. US states, Quebec, partnerships, companies, property income and other countries were not checked. Official pages were read on 2026-10-18.

The short answer

1. A profit motive is central in all three countries: a business is run to make a profit, and the agencies look for evidence that you act like it (in the UK, HMRC says a profit motive by itself is not conclusive).
2. No one factor decides it — the IRS, HMRC and the CRA each weigh all the facts.
3. Income still counts if it's a hobby in the US (reported separately); in the UK, small trading income may be covered by the trading allowance; in Canada, business income must all be reported.
4. Expenses and losses are a big difference: the IRS says hobby losses can't reduce your other income, and the CRA says a business has to exist before you can deduct business expenses or losses.
5. Keep records from the first sale — invoices, receipts and an income list help whichever way it goes.
6. Ask an adviser if it's borderline, or if you want to claim a loss.

On this page

• 1. Signs it has become a business
• 2. United States: the IRS hobby factors
• 3. United Kingdom: trading, badges of trade and the trading allowance
• 4. Canada: pursuit of profit or personal endeavour
• 5. Side by side
• 6. Step by step
• 7. Records checklist
• Free tools and kits
• Where the sources differ
• When to get advice
• Related
• Sources

1. Signs it has become a business

Our summary of the official factor lists below, not an official test. No single row decides it.

Whether you're self-employed or someone's employee is a different question: see employee or independent contractor.

2. United States: the IRS hobby factors

• The core idea: "Businesses operate to make a profit while hobbies are for pleasure or recreation." "No single thing is the deciding factor." (IRS: Is that activity just a hobby or a business?, IRS Tax Tip 2026-45, June 2, 2026). "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 with the intention of making a profit." (IRS: How to tell the difference between a hobby and a business, IRS Tax Tip 2022-57, April 13, 2022).
• The IRS answer to "How do you distinguish between a business and a hobby?" "A hobby activity is an activity not done for profit. This includes activities done mainly for sport, recreation, or pleasure. A business activity is an activity engaged in for profit. No one factor alone is decisive." "You must generally consider these factors in determining whether an activity is a business activity:"
  • Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
  • Whether you have personal motives in carrying on the activity.
  • Whether the time and effort you put into the activity indicate you intend to make it profitable.
  • Whether you depend on income from the activity for your livelihood.
  • Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
  • Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
  • Whether you were successful in making a profit in similar activities in the past.
  • Whether the activity makes a profit in some years and how much profit it makes.
  • Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
  (IRS FAQ: Income and expenses, page date 16-Oct-2026). "All factors, facts, and circumstances with respect to the activity must be considered. No one factor is more important than another." "Taxpayers should review all the factors to make the best decision."
• A quick rule of thumb from the Taxpayer Advocate Service: "If you are only getting a small amount of income occasionally throughout the year from an activity, but aren’t making a profit, you likely have a hobby. Keep in mind that you still need to report your income from your hobby on Schedule 1, Form 1040, line 8j." "However, you might be operating a business if you:"
  • Conduct your activity in a businesslike manner, such as by keeping complete and accurate books and records,
  • Put much of your time and effort into the activity;
  • Intend to make a profit from the activity;
  • Depend on the activity’s income for your livelihood; or
  • Generated profit from the activity in previous years.
  (Taxpayer Advocate Service: Hobby vs. Business Income, no page date shown).
• Hobby income: "You must include on your return income from an activity, even if you don’t expect to make a profit from that activity. An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. Enter this income on Schedule 1 (Form 1040), line 8j." (IRS: Publication 525, page date 30-Apr-2026).
• Hobby expenses and losses: "Deductions for expenses related to the activity are limited. They can’t total more than the income you report from the activity and can be taken only if you itemize deductions on Schedule A (Form 1040)." "Losses from a hobby aren’t deductible from other income."
• Business income from self-employment goes on Schedule C (Form 1040): see Schedule C for US freelancers, and US self-employment tax for the tax that can apply on top of income tax.
• Payment apps: "Regardless of the decision, if they’re paid through payment apps for goods and services during the year, they may receive an IRS Form 1099-K for those transactions. These payments are taxable income and must be reported on federal tax returns." See Form 1099-K and payment apps.
• Records: "Whether taxpayers have a hobby or run a business, good recordkeeping throughout the year will help when they file taxes."

3. United Kingdom: trading, badges of trade and the trading allowance

• Start here: "If you start working for yourself, you may need to report your income to HM Revenue and Customs (HMRC). You may also need to set up a business." "You’re likely to be trading if you:"
  • sell regularly to make a profit
  • make items to sell for profit
  • sell items on a regular basis, either online, at car boot sales or through classified adverts
  • earn commission from selling goods for other people
  • are paid for a service you provide
  "If you only occasionally sell items or rent out property (for example through auction websites or short-term rental apps), check if you need to tell HMRC about this income." "Contact HMRC for advice if you’re not sure whether you’re trading." (GOV.UK: Working for yourself, page date 2014-12-17).
• Running a business: "You’re probably running a business if you:"
  • take responsibility for its success or failure
  • have several customers at the same time
  • can decide how, where and when you do your work
  • can hire other people at your own expense to help you or to do the work for you
  • provide the main items of equipment to do your work
  • are responsible for finishing any unsatisfactory work in your own time
  • charge an agreed fixed price for your work
  • sell goods or services to make a profit
  "You can run a business and be employed at the same time, for example if you work for an employer during the day and run your own business in the evenings."
• Trading allowance: "The trading allowance is a tax exemption of up to £1,000 a year for individuals with trading income from:"
  • self-employment
  • casual services, for example, babysitting or gardening (helpsheet 325 has more information about other taxable income)
  • hiring personal equipment, for example, power tools
  "If your annual gross income from these is £1,000 or less, you do not need to tell HMRC, unless:"
  • you cannot use the allowances
  • you must register for Self Assessment and declare your income on a tax return
  (HMRC: Tax-free allowances on property and trading income, page date 2019-05-08).
• Telling HMRC: "You must tell HMRC if you have:"
  • gross trading income over £1,000 — register for Self Assessment
  • other gross income over £1,000 up to £2,500 — contact HMRC
  • other income over £2,500 — register for Self Assessment
  "If your gross income for a tax year is more than £1,000, you must register for Self Assessment by 5 October in the following tax year."
• Allowance or expenses: "If you use the allowances you can deduct up to £1,000, but not more than the amount of your income. This is known as ‘partial relief’." "If your expenses are more than your income it may be beneficial to claim expenses instead of the allowances."
• When you must register anyway: "You must register for Self Assessment and declare your income on a tax return when:"
  • you’ve made a loss and want to claim relief on a tax return (check helpsheet 227 for more information about losses)
  • you want to pay voluntary Class 2 National Insurance contributions to help qualify for some benefits
  • you want to claim Tax Free Childcare for childcare costs based on your self employment income
  • you want to claim Maternity Allowance, based on your self-employment
• When you can't use the allowance: "You cannot use the allowances in a tax year, if you have any trade or property income from:"
  • a company you or someone connected to you owns or controls
  • a partnership where you or someone connected to you are partners
  • your employer or the employer of your spouse or civil partner
• Records: "If you use the trading or property income allowances you must keep a record of your income." "Examples of the records you may need to keep are:"
  • copies of your invoices, paper or electronic
  • a spreadsheet of your income receipts
  • emails confirming income received
  • statements from the company who paid you which show the amount you received
  • bank statements
  • bank deposit pay-in records
  • a diary or appointments book showing your income from each customer

HMRC's staff guidance summarises the "badges of trade" — the signs the courts have used to decide whether there is a trade (HMRC Business Income Manual BIM20205, page date 2023-03-09). Several badges are about selling goods or assets, so they fit makers and sellers better than pure service work:

"These ‘badges’ will not be present in every case and of those that are, some may point one way and some the other. The presence or absence of a particular badge is unlikely, by itself, to provide a conclusive answer to the question of whether or not there is a trade." "The approach by the courts in using the badges of trade has been to decide questions of trade on the basis of the overall impression gained from a review of all the badges."

How the allowance works on the return, the expense boxes and the filing deadlines are in UK Self Assessment for freelancers — this page does not restate them. National Insurance is in UK self-employed National Insurance; VAT registration is separate, see the UK VAT registration threshold.

4. Canada: pursuit of profit or personal endeavour

• What a business is: "A business is an activity that you intend to carry on for profit and there is evidence to support that intention." "A business includes:"
  • a profession
  • a calling
  • a trade
  • a manufacture
  • an undertaking of any kind
  • an adventure or concern in the nature of trade
  "Business income includes income from any activity you do for profit. For example, the income from a service business is business income." (CRA: What is a business?, page date 2026-08-31).
• Report all of it: "Include all your income when you calculate it for tax purposes. If you do not report all your income you may be subject to a penalty of 10% of the amount you did not report after your first omission."
• When it starts: "You must start reporting your income and can start deducting your expenses when your business starts. The CRA looks at each case on its own merits. Generally, the CRA considers your business to have started whenever you begin some significant activity that is a regular part of the business or that is necessary to get the business going." "Suppose you do research on how to start a business in the hope of going into a business of some kind. The CRA would not consider that as a significant activity that is a regular part of the business."
• The two-stage test the CRA describes, from the Supreme Court of Canada's Stewart decision: "Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour?" and "If it is not a personal endeavour, is the source of the income a business or property?" "Generally, a personal endeavour is undertaken to obtain a personal benefit rather than a financial one. Personal endeavours are primarily undertaken for motives other than for profit, business, or commercial reasons." "Although an endeavour may have personal aspects, where it is pursued in a sufficiently commercial and business-like manner, it could be considered to be a business activity, which would generate business income for purposes of the Act." (CRA: Income Tax Folio S4-F14-C1, Artists and Writers, page date 2022-06-23).
• Evidence of profit intent: "Some objective factors to be considered when determining if there is an intention to profit identified in Stewart were: the profitability of prior years, the taxpayer’s training, the taxpayer’s intended course of action, and the capability of the venture to show a profit." "Whether a particular activity is undertaken with an intention to profit is a question of fact that can only be determined on a case-by-case basis." The folio is written for artists and writers and then lists factors for them, such as time spent, marketing, revenue and the history of profits or losses.
• Why it matters for expenses: "In order to be able to deduct business expenses incurred against income or for business losses to be deductible for income tax purposes, it must first be determined if a business exists."
• Freelance and gig work: "Gig workers who are resident in Canada must report and pay tax on all self-employment income by completing their income tax and benefit return and making sure their taxable income is reflected on line 26000, as well as by filing Form T2125, Statement of Business or Professional Activities." "To claim expenses, you have to keep proper financial records." "Keep track of your income and your expenses, including sales you make to buyers in Canada and other countries." (CRA: Gig economy, page date 2025-01-31).

How to fill in the form is in Form T2125 for Canadian freelancers. GST/HST registration has its own rules: see GST/HST: when to register and how much to set aside.

5. Side by side

Our summary of sections two to four, not official wording.

6. Step by step

Our order of steps, based on sections two to four — not an official checklist.

1. Write down what you sell, who pays you and how often.
2. Read the official factor list for your country and note which way each one points for you.
3. Start keeping invoices, receipts and an income list now, whatever you decide.
4. In the US, report hobby income on Schedule one, or business income on Schedule C.
5. In the UK, check whether the trading allowance covers you, and register for Self Assessment if it doesn’t.
6. In Canada, report business income on the statement of business or professional activities from the point your business starts.
7. Check sales tax separately: VAT and GST/HST registration have their own rules.
8. Look at it again each year, or when your customers, prices or hours change.
9. If it is borderline, or you want to claim a loss, ask an accountant or a tax adviser.

7. Records checklist

Our summary of the official pages above, not an official checklist.

• A list of every payment you received for the activity
• Copies of invoices or receipts you gave customers
• Receipts for what you spent on it
• Notes on your time, prices and customers
• Payment-app and platform statements
• Your answer to the official factors, kept with your records

For day-to-day records, see how to track freelance expenses. Choosing a name or a structure later? See freelance business names and sole trader vs limited company, LLC or corporation.

Free tools and kits

• Our free invoice generator, receipt generator, expense and receipt log (Canada) and hourly rate calculator run in your browser; nothing you type is sent or saved. They help you keep records and price your work; none of them decides whether you're running a business.
• Our paid Freelance Billing Kit by Small Rows (US$12, one-time) keeps the kind of records all three agencies mention: the Invoices tab has each invoice's number, client, issue date, amount paid and paid date, and the Expenses tab logs the date, category, description and amount of each cost, with yearly totals by category. It doesn't decide whether your activity is a hobby or a business, apply the trading allowance, or file anything with the IRS, HMRC or the CRA.
• All three kits together: the All-Kits Bundle by Small Rows (US$24, one-time).

Where the sources differ

• Words: the IRS asks whether an activity is engaged in for profit; GOV.UK and HMRC ask whether you are trading; the CRA asks whether there is a pursuit of profit or a personal endeavour.
• Small amounts: the UK has a trading allowance for small trading income; the US pages we read say hobby income is still reported; the Canadian pages we read have no similar allowance and say to report all business income.
• Hobby expenses in the US: Publication 525 says they are limited and need itemized deductions. We did not check how the current Schedule A rules treat them for your tax year, so ask a tax professional before counting on any.
• Kinds of guidance: the IRS tax tips and the HMRC manual page are short summaries; the CRA folio is written for artists and writers. We quote them for the general approach, not as rules for every trade.
• Old page dates: some pages show dates from earlier years (in Sources). We go by the wording on the day we checked.
• What we did not check: US state rules; the US regulations behind the IRS factors; HMRC's detailed manual pages behind each badge; property income and the property allowance in detail; Revenu Québec; partnerships and companies; the EU and other countries.

When to get advice

• you want to claim a loss from the activity against other income;
• the activity has had losses for several years in a row;
• it mixes personal use and business, such as equipment, a vehicle or travel;
• you sell things you made, collected or inherited, not just services;
• you have income from a company you or someone connected to you controls, or from your employer;
• you're near a VAT or GST/HST registration threshold as well.

Talk to an accountant or a tax adviser where you file. This page is general information only.

Related

• Schedule C for US freelancers
• UK Self Assessment for freelancers
• Form T2125 for Canadian freelancers
• Form 1099-K and payment apps
• Sole trader vs limited company, LLC or corporation
• Employee or independent contractor

Sources

• United States: IRS: Is that activity just a hobby or a business? (IRS Tax Tip 2026-45, June 2, 2026; no page date shown) · IRS: Here’s how to tell the difference between a hobby and a business for tax purposes (IRS Tax Tip 2022-57, April 13, 2022; no page date shown) · IRS FAQ: Small business, self-employed, other business — Income and expenses (page date 16-Oct-2026) · IRS: Publication 525, Taxable and Nontaxable Income (page date 30-Apr-2026) · Taxpayer Advocate Service: Hobby vs. Business Income (no page date shown)
• United Kingdom: GOV.UK: Working for yourself (page date 2014-12-17) · HMRC: Tax-free allowances on property and trading income (page date 2019-05-08) · HMRC Business Income Manual BIM20205: badges of trade summary (page date 2023-03-09)
• Canada: CRA: What is a business? (page date 2026-08-31) · CRA: Income Tax Folio S4-F14-C1, Artists and Writers (page date 2022-06-23) · CRA: Gig economy (page date 2025-01-31)

Checked 2026-10-18. Found a mistake? Tell us via Support.