The IRS takes the distinction very seriously.
Many small businesses start out as casual pastimes. You help troubleshoot your friends’ computer problems in your spare time, and they start telling their friends and business contacts about you. Or you use your woodworking skills to build furniture for non-profit organizations or your sewing skills to make one-of-a-kind dolls for the neighbor kids.
Word gets around that you’re good at what you do, but you can’t keep doing it for free. You have to start charging for your time in addition to the materials required.
There’s a point at which the Internal Revenue Service would consider you a business, obligating you to report your income and expenses on IRS forms and schedules come tax-filing. So how do you know when you reach that point?
To read more about the differences between a hobby and a business, click here.