Hello, I'm in my first year of running a small sole proprietorship as a photographer, in addition to my regular full-time employment with a private corporation. I need more help understanding whether my sole proprietorship constitutes a business or a hobby, and if a business, whether I should pay taxes on my revenue or my profit. First, the "Business or Hobby?" question. There doesn't seem to be a litmus test with a bright-line standard, but here's how I would answer each of the questions in the IRS publication: Does the time and effort put into the activity indicate an intention to make a profit? Yes. Does the taxpayer depend on income from the activity? No. If there are losses, are they due to circumstances beyond the taxpayer's control or did they occur in the start-up phase of the business? Occurred in the start-up phase of the business (this is the first year) Has the taxpayer changed methods of operation to improve profitability? No. Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business? Yes. Has the taxpayer made a profit in similar activities in the past? No. Does the activity make a profit in some years? N/A - first year Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity? Yes. So, based on my answers, am I properly categorized as a business or a hobby? My total devotion to this "employment" comes to about 4-6 hours per week. Now, the numbers: My revenue calendar YTD has been $1166.19. My expenses have been $1551.28, for a loss YTD of $385.09. Do I owe income tax on my revenue? Can I claim the operating loss as a business loss? I don't think I owe self-employment taxes since my profit was less than $400 for the year, right? Last question: If I do owe tax on my revenue, where does it go in my tax form since I am just a sole proprietor (not incorporated, etc.)? Thanks for your time and advice! Sincerely, kjbgu04