Hey, side hustler! We see you — hustling every day to make ends meet, saving up for that dream vacation, paying off your debts, or simply unleashing your creativity. You’re working hard. As a side hustler, you might think taxes aren’t applicable to you. But taxes are a way of life, and your side gig, whether it’s as a Lyft driver or IKEA furniture assembler, can have a direct impact on how much you owe.
Calculating taxes can seem daunting, but we’re here to help. We've laid out important information that will help you understand which taxes are applicable to your side gig(s) and how to go about calculating and filing for them.
Side Hustle Taxes — Do I Need to Pay?
All side hustle income, whether it's earned via Airbnb rental activity or being a social media influencer, is typically considered self-employment income. This income has to be reported directly to the IRS on your personal income tax returns by filing a Schedule C (Form 1040). Remember, this also applies to any cash payments you received for jobs performed. Any nondisclosure of earnings and failure of payment is considered tax fraud and can result in penalties of 0.5% of unpaid taxes every month.
How Do I Know If I Owe Taxes?
If you've completed work as a contractor or freelancer for a client, you might receive a Form 1099-NEC or Form 1099-K. Even if you haven't received this form, you’re still obligated to file a tax return disclosing your income and pay any required taxes on it. If you have multiple side gigs, you’ll need to account for all of them in your income tax returns.
How Much Can I Make on the Side Without Paying Taxes?
If you’re earning less than $600 (with net earnings or profits of under $400) in a calendar year, you probably won’t have to worry about paying taxes on your side hustle. But, you still have to report that income. Yes, this applies even if you’re a teen selling on eBay. The IRS has multiple ways of cross-checking income earned and failure to report this can lead to penalties, back taxes, jail time and possible closure of your moonlighting gig.
How to Calculate Side Hustle Taxes
There are three types of taxes a side hustler will have to pay. Here's how to calculate for them.
Self-Employment Tax
The self-employment tax is 15.3% of profits. As a side hustler, you are both the employer and employee, so you need to pay both sides of the social security tax — 12.4% of the self-employment tax goes to Social Security and 2.9% goes to Medicare.
Federal Income Tax
This is the tax you pay to the federal government. As most side gig earnings are on top of your regular, full-time job, we recommend setting aside money based on the marginal tax rate for federal taxes. An example of the 2023 single-filer tax brackets for the return you’ll file in 2024 is below:
State Income Tax
Not every state has an income tax; however, if you’re operating your business from one that does have one, then you can expect to pay between 0.3% to 13.3% of your income as state taxes.
We recommend setting aside 35% of your profits for tax purposes and to avoid any unwelcome surprises. Yes, this amount may seem astronomical, but it’s based on the three most common types of taxes you could be subjected to as a side hustler.
Do I Have to Pay Quarterly Tax on My Side Hustle?
The answer is that you might have to. If you foresee yourself owing more than $1,000 in federal taxes at the end of the year, the IRS will probably ask you to make the payments quarterly.
Quarterly payments deadlines are:
- April 15
- June 15
- September 15
- January 15 (of the following year)
How to Lower Your Side Hustle Taxes
Side hustle taxes can be a drag, especially when you’re just getting started. However, it’s not all doom and gloom — here’s some good news. The tax rules for side gig incomes are some of the most generous and beneficial ones.
If you're seeking to lower the amount of taxes you owe, one of the best practices that even pro-side hustlers follow is keeping account of all the deductions they can possibly take. If you’re a freelance writer on the side, your expenses could be buying a new laptop, a trade magazine subscription, or lunch with potential clients. You can deduct these expenses for tax purposes. Commonly available deductions for freelance or solopreneur businesses include:
- Marketing/advertising costs
- Business insurance
- Business meals
- Home office expenses
- Professional or legal fees
- Travel expenses
- Phone and Internet expenses
- Vehicle used in business
How do you account for all these deductions? You’ll need accurate records of everything and that’s where good bookkeeping practices can help.
Hobbies and Taxes Implications
"I don’t have a side hustle, but I did earn some money via a hobby. How do I report my hobby income on my taxes?" If you’ve earned any money via your hobby, you must report it in Schedule 1, line 8 of Form 1040. This income, however, isn’t subjected to self-employment tax. One point to note here is that any income earned via a hobby isn’t eligible for any expense deductions (so, no, you won’t be able to write off any home office expenses). Confused about distinguishing between a hobby and a side gig? Reading the IRS's guidelines will help.
Don't Mess with Taxes — Get Help From a Pro
If you aren’t careful about taking the time to understand how your side hustle will impact taxes, all the side gig earnings could cause serious trouble once tax season rolls around. Track all business expenses, identify which deductions can apply, and keep your business and personal accounts separate. Remember, every minute spent doing this will ease tax filing and potentially even result in adding more dollars to your pocket.
Taxes can be confusing — maybe you don't know whether you need to pay quarterly taxes or are unsure if you have accounted for all possible deductions. Incfile can help you out. Our team of tax experts will chat with you to understand your side hustle(s), answer any questions, and help you get your taxes done with confidence.
Swara Ahluwalia
Swara Ahluwalia is a freelance content writer with experience in the technical, B2B and SaaS domain. She also has curated content for various lifestyle brands. In her downtime, you will most likely find Swara training for her next marathon or spending time with her two daughters.
