When Does A Hobby Become A Business?

You take a painting class, and it turns out, you're a natural. Before long, you've got friends asking you to do portraits for them. Soon enough, strangers are asking for portraits, too. Now, you must start charging for services, because it's your hobby is becoming something of a day job. But you're not sure when, exactly, you crossed that line. One day you were just having fun painting your friend's dogs, the next you were seriously looking into quitting your 9 to 5 to paint full time.

It's important to know where the line is drawn for two big reasons: Taxes and insurance. You can't make business deductions on a hobby, and you don't want to run a business without insurance. So, when do you really have to make the leap?

There's no set-in-stone answer. There's no specific dollar amount where the profit makes you officially a business owner. But for insurance purposes, let's consider a few questions:

  • If something happened and you were not able to pursue your hobby next month, would you be unable to pay your bills on time?
  • Are clients coming to your home, leaving you to wonder whether your home insurance would cover it if they were injured on the premises?
  • Do you have anyone working for you?

If you answered yes to any of these questions, then it's time to start thinking about your hobby as a business.

There are ways to offset the risk of running a small business — such as hiring freelancers instead of full-time employees so that you don't need to worry about workers compensation coverage. But, if you intend to grow your business, then you are going to reach a point where business insurance becomes a necessity.

It is important to be honest and objective every step of the way. Be realistic about whether the income from your business can support you and whether it's worth growing in the first place. And be honest with yourself about whether it's time to look into getting covered under a business insurance policy.