The IRS factors that separate a selling hobby from a business, why the answer changes what you can deduct, and the $400 self-employment tax line.
Updated October 7, 2026
Before you start
The IRS factors that separate a selling hobby from a business, why the answer changes what you can deduct, and the $400 self-employment tax line.
Once you buy stock to resell, the IRS will ask whether you run a hobby or a business. The answer decides which form your income goes on, whether you can deduct shipping and supplies, and whether self-employment tax applies.
Below is the IRS's own framework from irs.gov, written for someone flipping from a spare room. It is general information, so check your own case with a tax professional.
Kit for this
The products this guide uses, with typical US prices.
QuickBooks
Suits you if your reselling has become a business and you want income, costs and a running tax estimate in one place. It pulls in your bank and card transactions and sorts them into Schedule C categories.
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Xero
Suits you once your shop has inventory, invoices and maybe a helper. It pulls details from receipts you photograph, and your accountant can see the books live.
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Visit siteThe guide
Each step in the order you'll need it.
The factors the IRS weighs
The IRS lists factors such as running the activity in a businesslike way, keeping complete books, the time and effort you put in, whether you depend on the income, and whether you change methods to make a profit.
No single factor decides it. Someone who sources at estate sales every Saturday, tracks every sale and adjusts prices to turn a profit looks like a business. Someone selling their own closet twice a year does not.
Hobby income and expenses
Hobby income is still taxable and goes on Schedule 1 of Form 1040 as other income. Since the 2018 tax law, hobby expenses are not deductible, so you pay tax on the gross amount.
A $3,000 hobby year with $1,800 of costs leaves tax due on all $3,000. The same numbers as a business leave tax on $1,200.
Business income on Schedule C
A selling business reports on Schedule C. You list gross sales, take off the cost of the goods you sold, then deduct expenses such as platform fees, shipping labels, mailers, a label printer and mileage to sourcing trips.
The profit at the bottom flows to your Form 1040. Keep receipts for every cost: the deduction is only as good as the record behind it.
Kit for this step
Self-employment tax at $400
If your net earnings from self-employment are $400 or more, you file Schedule SE and pay self-employment tax of 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare.
That is on top of income tax, and nobody withholds it for you. Set aside a share of each payout from the start so April is not a shock.
Quarterly estimated payments
The IRS expects tax as you earn. If you will owe $1,000 or more for the year, it asks for estimated payments four times a year, and late or missing payments can bring a penalty.
Many part-time sellers with a W-2 job raise their paycheck withholding instead. Ask a tax professional which suits you.
Setting up like a business
Open a separate bank account for sales and costs, even as a sole proprietor. Keep an inventory list with cost per item, and save the platform payout reports each month.
Accounting software that links to the bank account and categorizes costs makes Schedule C a one-evening job instead of a weekend.
Kit for this step
Checklist
Run through it before each one goes out.
- 1Write down whether you buy to resell for profit
- 2Open a separate account for selling money
- 3Keep cost and receipts for every item and supply
- 4Set aside a share of each payout for tax
- 5Check whether you need quarterly estimated payments
- 6Ask a tax professional before your first Schedule C
Setups
Complete kits for one kind of seller, costed and laid out.
Questions
Straight answers to what sellers ask about this.
Is selling on Poshmark a hobby or a business?
It depends on how you do it. Clearing your own closet now and then is neither. Buying to resell for profit, regularly, looks like a business to the IRS.
Can I deduct shipping and mailers as a hobby seller?
No. Since 2018, hobby expenses are not deductible. As a business you deduct them on Schedule C.
Do I pay self-employment tax on small profits?
Once net earnings from self-employment reach $400 for the year, you file Schedule SE and pay it.
Do I need an LLC?
No. A sole proprietor files Schedule C under their own name. An LLC is a legal choice for liability, and a lawyer or accountant can tell you if it fits.
Can a business show a loss?
Yes, in early years, but repeated losses can lead the IRS to treat it as a hobby. Good records and a clear plan to profit help.
Is this tax advice?
No. It summarizes IRS guidance. A tax professional can apply it to your own numbers.