How To Pay Taxes on Side Hustle Income

We all know the expression, “Don’t quit your day job.” But for many of us, having a side hustle alongside our salaried job offers us financial breathing room to plan for the future.

What many people don’t realize is that even that income comes with a price tag at tax time. But fear not! Armed with the right tools, your side gig might even save you money when you file.

Do you have to pay taxes on side hustle income?

Any income you earn outside of your day job is referred to as “self-employment income," and is subject to taxes. And yes, that includes work that's temporary, part-time, paid in cash, or not reported on a 1099 tax form. Leave it to Uncle Sam to spoil a good thing.

That might sound overkill for something like Lyft or Uber driving on nights and weekends, selling on TikTok shop, or writing a corporate blog post here and there. But as far as the IRS is concerned, you’re a sole proprietor for tax purposes, running a small business all by yourself.

The good news: reporting income and owing tax are not the same thing. Your final tax bill depends on:

• Whether the activity is a business, hobby, second job, rental, or sale of personal property

• How much profit you earned after deductible expenses

• Your income from other sources

• How much tax was already withheld

• The deductions and credits you qualify for

• Your state and local tax rules

For example, a freelance designer who collected $5,000 and spent $1,500 on eligible business expenses generally has $3,500 of net business profit. That $3,500, not the full $5,000, is the starting point for calculating income and self-employment taxes.

Four side hustle tax thresholds people commonly confuse

You may have heard these thresholds floating around in Reddit discourse. Let's break these down.

What taxes do you pay on a side hustle?

While there are many upsides to being self-employed, there’s one annoying downside: self-employment taxes. So as a self-employed worker, you're on the hook for:

• Federal income tax: If you have a W-2 job, your side-hustle profit may be taxed at the marginal rate that applies to your next dollar of income. A marginal tax rate is the rate applied to a particular portion of your income, not your average rate across all your income.

• Self-employment tax: The self-employment tax funds Social Security and Medicare. The rate is generally 15.3%, but it usually applies to 92.35% of your net self-employment earnings rather than directly to 100% of your profit. To learn more about how they work, check out our intro to self-employment taxes.‍

Unlike income tax, which can be reduced through tax adjustments and individual deductions, the only thing that can reduce self-employment taxes are business write-offs and tax credits. So don’t be surprised if you owe slightly more than usual after you start your side hustle.

How is self-employment tax calculated?

Self-employment tax is based on net business profit, not total revenue. Consider this simplified example:

• W-2 wages: $30,000

• Side-hustle revenue: $12,000

• Eligible side-hustle expenses: $2,000

• Net side-hustle profit: $10,000

The approximate self-employment tax calculation would be:

1. $10,000 × 92.35% = $9,235 of net earnings subject to self-employment tax

2. $9,235 × 15.3% = approximately $1,413 of self-employment tax

What a sole proprietorship means for your taxes

There’s a lot of bad guidance out there for self-employed individuals, so let’s cut to the chase:

• ✘ No, you don’t need to register for an LLC

• ✘ No, you don’t need to file for a business EIN number

• ✘ And no, you don’t need to open a business checking account

Here’s the skinny: as a sole proprietor, you can earn business income and claim business deductions without formally starting a business.

When it comes time to file, all you have to do is attach Form Schedule C to your individual 1040 tax return. Schedule C reports your 1099 income. From there, you can calculate your self-employment taxes using Schedule SE.‍

5 tips for filing taxes on side hustle income

Not keen on a higher tax bill? I’m right there with you. Let’s look at some tips and tricks to minimize your self-employment taxes, so you aren’t caught off guard come April.

Tip #1: Know what you can write off

Self-employment taxes are assessed on your net business income. That’s your gross income minus expenses.

That means the best way to lower taxes on your side hustle is to lower your business income.

How does one do that? Great question.

The answer is business write-offs. A business write-off is just another way of saying your work-related expenses.

As long as the expense is considered "ordinary and necessary" for running the business, it probably counts. Common examples include things like:

• 🚗 Auto expenses

• 📱 Your cell phone bill

• 🔧 Tools and supplies

• 🌐 Wi-Fi costs

• 🧑 Dues and subscriptions for memberships to business associations or unions

• 🖥️ Office expenses

Important: Personal expenses are not deductible. If an expense is partly personal and partly for business, you can generally deduct only the business portion.

For example, if 30% of your phone use is reasonably connected to your freelance work, you may be able to deduct 30% of the eligible phone expense. Keep records showing how you calculated the business percentage!

If you’re able to pull together enough write-offs, you might not owe any self-employment tax at all. (And if you have so many that you generate a loss, it might even lower your regular income taxes.)

Tip #2: Skip the business bank account

When it comes to claiming write-offs, many resources say you need a business checking account. This isn’t true. What you are required to do is keep business records, which is much easier to do with separate accounts.

For freelancers and contractors who are picking up extra work, using your personal accounts might make more sense.

As long as you have a system for tracking your work expenses during the year, you aren’t breaking any laws by buying work-related things using your personal account.

In fact, this challenge is what inspired Keeper’s app in the first place. Gig workers and side hustlers need tools to track their write-offs easily and efficiently. Keeper links up to 10 bank accounts and credit cards to automatically scan and categorize your tax deductible expenses and file taxes.

Tip #3: Set aside 20-30% of your earnings for taxes

Woof, right? I hated writing that as much as you hated reading it. Unfortunately, 20-30% is the most realistic estimate of how much to save. Here’s why.

Most taxpayers working side gigs fall into federal income tax brackets with effective rates ranging from 12-22%. (Your effective tax rate is your average tax rate.) Add the 15.3% from self-employment taxes on top of that, and the safest approach is to assume 30% of your income will evaporate into thin air.

That might not actually be the case if you maximize your tax write-offs. Still, it’s always better to be conservative when it comes to taxes. If you overpay, you’ll get it back as a refund, but if you underpay, you could be subject to underpayment penalties and interest.

Keeper pro tip: Automatically set aside a portion of your earnings for taxes in a high yield savings account (HYSA), which earns ~10x the interest compared to a traditional savings account.

Tip #4: Make payments as you go

We have a pay-as-you-go tax system. What does that mean? It means that your tax technically isn’t due April 15, it’s due at the time it’s earned.

For your W-2 income, this part is easy. Your employer will withhold taxes on the money you earn from your day job, so you don’t have to worry about it at the end of the tax season.

When it comes to your moonlighting, though, paying as you go, can complicate matters. Without an employer handling taxes on that income for you, you’re left to fend for yourself.

This isn’t just bad news for you, it’s bad news for the IRS too. They want your – err – their money as soon as possible. Consequently, they’ve designed a very easy system to help you pay up on time.

‍Making estimated tax payments

‍‍Due every three months, estimated tax payments are a great way for freelancers and side hustlers to stay on top of things. You can use Keeper’s quarterly tax calculator for an easy projection of how much to pay on the extra money.

The IRS sets deadlines for estimated tax payments on a quarterly basis. The dates don’t align with regular calendar quarters, though. The IRS keeps its calendar of tax deadlines updated on its website.

If a deadline falls on a weekend or legal holiday, it generally moves to the next business day. Disaster-related extensions may also apply.

If cash-flow is tight, just pay as much as you can. It’s better to make a small payment by the due date than to play catch-up on the whole amount next quarter. You don't want to get hit with underpayment penalties, do you?

You can generally avoid an underpayment penalty by paying at least the smaller of:

• 90% of the tax shown on your current-year return, or

• 100% of the tax shown on your prior-year return

The prior-year target generally increases to 110% for taxpayers whose prior-year adjusted gross income exceeded $150,000, or $75,000 if married filing separately. That's called the safe harbor rule, which is basically the IRS's promise that they won't charge you an underpayment penalty as long as you pay enough through quarterly estimated taxes.

Don’t want the headache of making estimated payments? Depending on your situation, you might have another option: using your W-2 job to pay as you go.

‍Adjusting your W-2 withholding‍

Believe it or not, you can ask your employer to increase your W-2 withholding to cover the taxes on your side income. All you need is an idea of how much you want to set aside for taxes. Just tell your employer how much extra you want them to withhold for the month — or for the quarter. Alternatively, you can complete a new Form W-4, which lets you report additional income to adjust your withholding calculation.

Tip #5: Get familiar with your Schedule C

I mentioned this earlier, but Schedule C is how you’ll report your side income. I recommend every freelancer at least look at their Schedule C once, even if they hire someone else to prepare it.

Schedule C is where you’ll report your income, business write-offs, mileage deduction, and home office deduction. It’s also the form you’ll need to produce if you ever apply for a bank loan or need to verify income to other creditors.

If you’re a DIY kind of person, check out our step-by-step guide to filling out your Schedule C.

Before you start filing, always start by:

• Adding up income from clients, platforms, cash payments, tips, goods, and other compensation

• Comparing your records (bank statements, spreadsheets, etc.) with your 1099 tax forms

• Categorizing eligible business expenses

• Reviewing estimated payments and W-2 withholding

Then, most sole proprietors and independent contractors use the following forms:

FAQs

Do I have to report side hustle income if I didn't receive a 1099?

Yes, you still owe taxes on the income earned even if you didn't receive a 1099. Use your own payment and sales records to identify income you should be reporting.

Is side hustle income under $2,000 tax-free in 2026?

No. The $2,000 amount is a reporting threshold for payers issuing certain Forms 1099-NEC and 1099-MISC. That means if you earned less than $2,000 you may or may not receive a 1099 form. You still owe taxes on that income!

Do I pay taxes when selling used personal items online?

Selling a personal item for more than you paid may produce a taxable gain. A loss from selling personal property for less than its original cost is generally not deductible. Keep records showing what you originally paid, the sale price, and any selling fees.

What if a payment app sends an incorrect Form 1099-K?

First, contact the payment app or marketplace and request a corrected form. Personal reimbursements and gifts generally are not taxable, but you may need to explain an incorrect Form 1099-K on your return if the issuer does not correct it.

Can I deduct an expense paid from my personal account?

Potentially. Paying a legitimate business expense from a personal account does not automatically disqualify the deduction. Keep the record showing the business purpose and any personal portion.

Can business deductions eliminate self-employment tax?

Valid business deductions reduce net profit, which can reduce self-employment tax. If net earnings from self-employment fall below $400, you generally will not owe self-employment tax. However, deductions must reflect real, ordinary, and necessary business expenses.