Important Disclaimer: This article provides general information only and should not be construed as tax, legal, or financial advice. Tax situations vary widely based on individual circumstances, income levels, business structures, and state regulations. We strongly recommend consulting with a licensed CPA, tax professional, or financial advisor who can review your specific situation before making any tax-related decisions. When in doubt, always consult a professional—it’s worth the investment to get it right.
You started selling those handmade candles on Etsy. Or freelance writing on weekends. Maybe you’re driving for a rideshare service or consulting in your area of expertise. According to a 2024 report from the U.S. Small Business Administration, there are over 34 million small businesses in America, and nearly 40% of Americans now rely on side hustles for extra income.
But here’s what many new side hustlers don’t realize until tax season hits: that extra income comes with extra responsibilities. Unlike your regular paycheck where taxes are automatically withheld, your side hustle earnings? Those are on you to track, report, and pay taxes on. And the IRS has some very specific rules about how that works.
If you’re earning money outside your primary job—even if it’s just a few hundred dollars—here’s what you need to know to stay on the right side of the tax code and keep more of what you earn.
Do You Need to File?
Let’s start with the baseline: if you earn $400 or more from your side hustle in a year, you’re required to file a tax return and report that income, according to the IRS guidelines for self-employed individuals. That’s net income (after expenses), not gross.
And here’s the kicker: you need to report all side hustle income, whether or not you receive a 1099 form. Got paid in cash? Venmo transfers from clients? Checks made out to you? All of it counts. The IRS has made it clear: every dollar you earn is taxable, regardless of the payment method.
What About 1099 Forms?
If you earned $600 or more from a single client or platform, you should receive one of these forms:
- Form 1099-NEC (Nonemployee Compensation): For freelance work, consulting, or contract services
- Form 1099-K: For payments through third-party platforms like PayPal, Venmo, Etsy, or Uber
- Form 1099-MISC: For other types of income like rent or prizes
The 1099-K threshold has been in flux. For 2024, the IRS used a $5,000 threshold. For 2025 and beyond, the rules are still evolving—some sources indicate it may drop to $600, while recent legislation suggests it could revert to the previous threshold of $20,000 and 200+ transactions. Regardless of which form you receive (or don’t receive), you’re responsible for reporting all income.
Understanding Self-Employment Tax
Here’s where side hustle taxes differ significantly from W-2 employee taxes. When you work for an employer, they pay half of your Social Security and Medicare taxes (7.65%), and you pay the other half through payroll deductions. But when you’re self-employed? You’re responsible for the full 15.3%.
This is called self-employment tax, and it breaks down as follows:
- 12.4% for Social Security (on earnings up to $168,600 for 2025)
- 2.9% for Medicare (on all earnings)
The good news: you can deduct half of your self-employment tax when calculating your taxable income, which helps offset the burden somewhat.
Self-employment tax is calculated on 92.35% of your net earnings from self-employment. So if your side hustle netted $10,000 after expenses, you’d calculate self-employment tax on $9,235.
Quarterly Estimated Tax Payments: The Big One Most People Miss
Unlike traditional employment where taxes are withheld from every paycheck, side hustlers typically receive payment in full—no taxes taken out. The U.S. tax system operates on a “pay-as-you-go” basis, which means the IRS expects you to pay taxes throughout the year, not just in April.
If you expect to owe $1,000 or more in taxes when you file your return, you’re required to make quarterly estimated tax payments. Miss these, and you could face penalties and interest—even if you pay your full tax bill by April 15.
2025 Quarterly Tax Deadlines
- April 15, 2025: For income earned January 1 – March 31
- June 16, 2025: For income earned April 1 – May 31
- September 16, 2025: For income earned June 1 – August 31
- January 15, 2026: For income earned September 1 – December 31
Use Form 1040-ES to calculate and pay your estimated taxes. You can pay online through the IRS Direct Pay system, or by check or money order.
The W-4 Workaround
If you have a full-time job with W-2 income, there’s another option: increase your withholding at your main job to cover the taxes on your side hustle income. File a new W-4 with your employer to have more taken out of each paycheck, and you may be able to skip the quarterly payments altogether.
Tax Deductions: Keep More of What You Earn
The silver lining of side hustle taxes? You can deduct ordinary and necessary business expenses, which reduces your taxable income. According to tax professionals, these deductions can significantly lower your tax burden if you keep good records.
Common Deductible Expenses
- Home Office: If you use part of your home exclusively and regularly for business, you can deduct a portion of rent/mortgage, utilities, and internet. The space must be dedicated to work—not a corner of your bedroom that also serves as your yoga spot.
- Vehicle Expenses: For 2025, the standard mileage rate is 70 cents per mile for business use. Keep a detailed log with dates, destinations, purpose, and miles driven. Alternatively, you can deduct actual expenses (gas, insurance, repairs) based on the percentage of business use.
- Supplies and Equipment: Laptop, software subscriptions, tools, materials, office supplies—if you use it for your business, it’s deductible.
- Internet and Phone: You can deduct the business-use portion of your phone and internet bills.
- Marketing and Advertising: Business cards, website hosting, social media ads, promotional materials.
- Professional Services: Accounting fees, legal consultations, business coaching.
- Education and Training: Courses, workshops, books, and conferences directly related to your side hustle.
- Insurance: Business liability insurance, professional indemnity insurance.
The QBI Deduction
If you’re operating as a sole proprietor, you may qualify for the Qualified Business Income (QBI) deduction, which allows you to deduct up to 20% of your qualified business income for 2025. (This is set to increase to 23% in 2026, according to recent legislative changes.) This can result in significant tax savings, but there are income limitations and phase-outs to consider.
Recordkeeping: Your Best Defense
Good recordkeeping isn’t just about staying organized—it’s about protecting yourself. If the IRS ever audits you, detailed records are your evidence. According to CPAs who work with side hustlers, the most common mistake is poor documentation.
Best Practices
- Open a Separate Bank Account: Keep business income and expenses completely separate from personal finances. This isn’t legally required, but it makes tracking infinitely easier and looks much better in an audit.
- Save Every Receipt: Digital or physical, doesn’t matter—just save them. Apps like Expensify, QuickBooks, or even a simple photo album on your phone work.
- Track Everything in Real Time: Don’t wait until tax season. Record income and expenses as they happen. A simple spreadsheet works fine—date, description, category, amount.
- Keep Records for 3-7 Years: The IRS recommends keeping records for at least three years from the date you filed your return, but up to seven years for certain situations.
- Document Mileage: If you’re deducting vehicle expenses, keep a detailed mileage log. Apps like MileIQ or Everlance can track automatically.
Set Aside Money for Taxes
Here’s a rule of thumb: set aside 25-30% of your side hustle income for taxes. Open a separate savings account and transfer money there every time you get paid. When quarterly taxes or April 15 rolls around, you’ll have the funds ready to go.
How to File: The Forms You’ll Need
When tax season arrives, you’ll report your side hustle income using these forms:
- Schedule C (Profit or Loss from Business): This is where you report your income and expenses. You’ll calculate your net profit here.
- Schedule SE (Self-Employment Tax): This calculates your self-employment tax based on your net profit from Schedule C.
- Form 1040: Your main tax return, where everything comes together.
Most tax software (TurboTax, H&R Block, TaxAct) walks you through this process and generates the forms automatically. If your side hustle has grown beyond a few hundred dollars, it’s often worth paying for the self-employed version or consulting a tax professional.
IRS Free File
If your income is below certain thresholds, you can use IRS Free File for free tax preparation software. There are also Volunteer Income Tax Assistance (VITA) sites that offer free in-person help.
Should You Form an LLC?
Once your side hustle starts generating consistent income, you might wonder: should I form an LLC (Limited Liability Company)?
There’s no legal requirement to form an LLC for a side hustle. Many operate as sole proprietors indefinitely. But an LLC offers some significant advantages:
Benefits of an LLC
- Liability Protection: An LLC creates a legal separation between you and your business. If someone sues your business or you default on a business loan, your personal assets (home, car, savings) are generally protected.
- Credibility: Having “LLC” in your business name can make clients take you more seriously, particularly if you’re working with corporate clients or seeking larger contracts.
- Tax Flexibility: You can choose how your LLC is taxed—as a sole proprietor, partnership, S corporation, or C corporation. If your net income exceeds $40,000-$50,000, electing S corp status might reduce self-employment taxes.
- Professional Growth: An LLC allows you to open business bank accounts, build business credit, enter contracts, and hire employees more easily.
When to Consider an LLC
According to business formation experts, consider forming an LLC if:
- You’re earning $40,000+ per year from your side hustle
- Your business involves any liability risk (working with clients in person, using equipment, providing professional services)
- You’re taking on a business partner
- You want to hire employees
- You have significant personal assets to protect
- You’re ready to treat this as a real business, not just a hobby
Drawbacks to Consider
- Cost: Filing fees range from $40 to $500 depending on your state, plus potential annual fees
- Paperwork: You’ll need to file annual reports in most states and maintain separate business records
- Complexity: More complex tax filing, especially if you elect S corp status
If your side hustle is low-risk and bringing in less than $12,000 per year, the simplicity of remaining a sole proprietor might outweigh the benefits of an LLC.
Bonus: Use Your Side Hustle to Boost Retirement Savings
One often-overlooked benefit of self-employment income: you can contribute to retirement accounts that reduce your taxable income right now.
Retirement Account Options for Side Hustlers
- Traditional IRA: Contribute up to $7,000 ($8,000 if you’re 50 or older) for 2025, with tax-deferred growth
- SEP IRA: Contribute up to 25% of your net earnings or $70,000, whichever is lower—great if you’re earning significant side income
- Solo 401(k): Contribute up to $23,500 as an employee ($31,000 if 50+), plus up to 25% of net earnings as an employer—potentially allowing total contributions up to $70,000
These contributions reduce your taxable income and build your retirement savings. It’s a win-win.
Common Mistakes to Avoid
- Not reporting cash income: The IRS knows about cash transactions. Report everything.
- Mixing business and personal expenses: This makes recordkeeping a nightmare and raises red flags in audits.
- Skipping quarterly payments: The penalties add up quickly. Set reminders for those quarterly due dates.
- Not keeping receipts: No receipt = no deduction. The IRS won’t take your word for it.
- Claiming personal expenses as business: That yoga retreat isn’t a business expense unless you’re a yoga instructor teaching a retreat. The IRS knows the difference.
- Not separating finances: Open that separate bank account. It protects you legally and makes everything easier.
- Waiting until tax season to organize: Track income and expenses in real time. Your April self will thank you.
When to Hire a Professional
If any of these apply to you, it’s time to consult a CPA or tax professional:
- Your side hustle nets more than $10,000 per year
- You’re considering forming an LLC or electing S corp status
- You have multiple income streams or complex deductions
- You’re not confident calculating estimated taxes
- You received an IRS notice or are facing an audit
- You want to maximize deductions but aren’t sure what qualifies
Yes, hiring an accountant costs money upfront (typically $200-$500+ depending on complexity). But the tax savings they find often exceed their fee, and the peace of mind is priceless.
According to financial advisors, the investment in professional tax advice can pay for itself in tax savings and help you avoid costly IRS penalties.
Side hustle taxes are more complex than W-2 taxes, but they’re not insurmountable. The key is to stay organized, track everything, set aside money throughout the year, and don’t be afraid to ask for help when you need it.
Think of tax obligations as the price of admission to building wealth on your own terms. Every successful business owner has navigated these same waters. With the right systems in place, you can keep more of what you earn while staying completely compliant with IRS requirements.
And remember: this article provides general information only. Your specific tax situation depends on numerous factors including your income level, state of residence, business structure, and individual circumstances. When in doubt, consult with a licensed tax professional who can provide guidance tailored to your situation.
