Streaming as a Hobby vs. a Business or Sole Proprietorship

7 minute read

Many small streamers and video creators consider their channel a hobby, and either attend school or have another job to provide their income. Although there are some advantages to having your activities classified as a hobby, there are some reasons why you may prefer the IRS to see you as a business — or more specifically, a sole proprietorship — instead.

Many of the advantages Twitch/YouTube/Facebook creators assume would come along with being a hobby don’t actually exist. Most notably:

Hobby income is still taxed

Your channel being a hobby doesn’t shield it from income taxes. If it is your only source of income, your total income may fall under the threshold necessary for an income tax filing — which for 2021 is $12,550 for single individuals.

However, if you have another source of income, or if you are electing to file taxes to qualify for certain federal programs, you will still need to track and declare all of your stream income. That’s what Line 8 on Schedule 1 (“Additional Income”) of Form 1040 is for.

Just because it’s a hobby doesn’t mean the IRS doesn’t want a piece of it.

…but it is taxed at a lower rate

The major advantage of income being from a hobby rather than a business is that it is not subject to self-employment taxes.

While hobby income is reported on Schedule 1 and taxed at the taxpayer’s standard rate, business income from a sole-proprietorship is reported on Schedule C and is subject to Social Security and Medicare Taxes, commonly called self-employment taxes.

The rate is 15.3%, and it applies to all self-employment earnings from the first dollar. Hobby income avoiding this additional tax can end up saving money.

…but you don’t get deductions

However, deductions to hobby income work differently than deductions to business income. It isn’t quite accurate to say that you get no deductions, however most earners are unlikely to see any benefit from deductions to hobby income.

This is because your deductions cannot offset hobby income directly. Rather, they are part of your general itemized deductions. And unless your total itemized deductions exceeds the standard deduction amount — $12,550 in 2021 for single individuals — you will probably not itemize your deductions, and so your stream expenses are moot.

Your deductions also only count if they “ordinary and necessary” for the hobby. Business deductions don’t receive the same level of scrutiny, but you must be prepared to justify each of your hobby deductions as being ordinary and necessary for the act of streaming or video creation.

…but it is simpler to file

If your total channel income is low, you may be willing to forego any potential tax advantages just for ease of filing. Hobby income only requires a single number on a single line, specifically Line 8 of Form 1040 Schedule 1. While business income requires a full Schedule C.

With the aid of tax software, the difference may be minimal.

Are you a hobby or a business?

Remember, the IRS determines whether you are a hobby or a business; not you. It’s an IRS classification and not a personal one.

The decision about whether your activities constitute a business or a hobby is not based on colloquial understanding of those terms, but rather nine specific facts that the IRS has identified that it looks for:

  1. Whether your operate your channel in a businesslike manner - Most streamers keep records of viewership, ad revenue, subscription revenue, tips/donations and other statistics, making it seem much more businesslike in the IRS’s eyes.

  2. The amount of time and effort you put into your channel - Spending a lot of time on a potentially money-generating activity like content creation is more likely to be viewed as an intent to make a profit. This is subjective, but the time typically spent on streaming and video creation would likely qualify as a business.

  3. Whether you depend on the income - This is very situation specific. If the loss of your stream income would have an effect on your overall lifestyle, this would make it more likely for you to be qualified as a business.

  4. Whether the channel actually makes a profit - If you have had a channel for years, and have consistently been earning money from it for years, it’s probably a business. A hobby generally costs money, and an activity that regularly earns money is more business-like.

  5. If you have made money from similar activities in the past - If you are a revenue-earning Twitch streamer who transitions to YouTube, or a performing musician who begins playing sets on Twitch, you’re likely to be seen as a business even if you’re not yet earning any or much revenue.

  6. If you take steps to improve profitability - Accepting sponsorships, changing ad placements, signing affiliate agreements would all look like steps taken to improve profitability.

There are 3 more questions that would probably not apply to content creators, but will be listed here for the sake of completeness: whether you expect assets to appreciate in value, whether you have specialized knowledge needed to carry out a successful business, and whether you have financial losses beyond your control.

On the whole, because of the nature of Twitch, YouTube, and other content creation sites, in most general circumstances, a channel would be seen as a business rather than a hobby, especially since these platforms typically sign contracts with their creators in a business-like way, and submit tax forms for their creators in a business-like way.

Are you a sole proprietorship?

If you have determined that you are probably a business, you will also now determine that you are probably a sole proprietorship.

In the United States, self-run businesses are by default sole proprietorships. This doesn’t really mean anything aside from the fact that you do business in your own name rather than in the name of a company, and that you are a “pass-through entity” for income tax purposes.

Pass-through entity just means that you report the business income on your own personal taxes instead of on a separate corporate return — in other words, the income “passes through” the business to you.

If you start your channel with one or more other people, you would be considered a partnership rather than a sole-proprietorship, but the same general rules about pass-through taxation still apply. It is wise to create a partnership agreement if you are in this situation.

You may choose to be taxed a different way, which often involves forming a corporation or LLC. There are some business and tax advantages for going this route.

Self-employment taxes

So now you’re a business and a sole proprietorship. If this is a new discovery for you, welcome to business ownership! You’ll notice it feels mostly the same as before.

Except now you’re responsible for self-employment taxes.

The rate is 15.3%, and it applies to all self-employment earnings from the first dollar, provided you earned at least $400 from any self-employment activities in a year.

Note that the $400 is different from the $600 to receive a 1099-MISC. Both Twitch and YouTube will send you (and the IRS) a 1099 form at the end of the year if you earn at least $600. However the threshold for self-employment taxes is $400, so you may still be required to file even if you never receive a 1099.

The aid of a tax preparer or tax software is recommended if you are reporting self-employment income, as it does bring additional complexity to your filing.

Deductions

Needing to file a Schedule C and claim self-employment income means you also get to offset that income with reasonable business deductions. Purchasing a game specifically for a stream, or buying a camera used solely for your channel could qualify as deductions.

However, something that you use for both business and personal uses cannot be fully deducted. For instance, if you buy a new computer to edit or encode video, but also use that computer off-stream for any personal uses, you may only deduct the business-use portion of that expense. The same goes for anything you buy “for the channel” if you’re also getting personal use out of it.

Although the world of content creation means you have rather wide lattitude in what exactly constitutes a business expense — hot tubs can be deductable, after all — abusing deductions and trying to stretch for every dollar is a leading cause of small business audits.

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