Side hustles are a popular way to make extra money, pay down debt, and boost savings. According to a 2022 Zapier report, 40% of Americans have a side hustle.
But many people don’t report their side gig income on their taxes. They often believe that extra income isn’t taxable, but that’s a costly mistake. The Internal Revenue Service is very clear; you must file a tax return and report earnings from self-employment of $400 or more, even if it’s from gig work, a side hustle app, or a temporary job.
There can be serious repercussions if you don’t report your income as the IRS requires. Learn how to pay taxes on side hustle income to file your tax return properly and avoid hefty penalties.
Do I Have to Pay Taxes on My Side Hustle?
Many people wonder, “do you have to pay taxes on a side hustle?” The answer is a resounding yes. Whether you sell crafts on Etsy, deliver groceries for Shipt, or walk dogs through Rover, any income of $400 must be reported on your tax return, and you must pay federal and state income taxes on your earnings.
Side hustle taxes may seem unnecessary when you’re just starting out or aren’t making much money. But the penalties for not reporting your income and paying the appropriate taxes can be steep.
When you earn money through a third-party company like Uber or DoorDash, you will likely receive a 1099 form that lists the income you earned from the platform during the tax year. The platform also reports that information to the IRS, and it’s your responsibility to pay the necessary taxes.
Even if you do not receive a 1099 form, you must still report and pay taxes on your earnings. For example, if you do freelance work for a client on your own or have a cash-based business, you may not receive a 1099, but you still have to report the income that you made.
How to Calculate Estimated Taxes for Your Side Hustle
The IRS requires you to pay taxes as you earn or receive income throughout the year. For most people, taxes are deducted from their paychecks. But that’s not the case with side gigs or self-employment; you’re responsible for paying taxes on your own.
If you have a full-time job, you can adjust your W-4 withholding to pay more taxes from your paycheck to cover your side gig income. Or, you can pay estimated taxes every quarter. If you don’t adjust your withholding or make estimated tax payments — or if you make payments late — the IRS will charge you penalties.
Individuals generally have to make estimated tax payments if they expect to owe $1,000 or more when they file their tax returns. You can use the Form 1040-ES (Estimated Tax for Individuals) worksheet to find out if you must pay estimated taxes.
Self Employed Taxes
Estimated tax payments cover income, self-employment, and alternative minimum taxes. The self-employment tax consists of Medicare and Social Security taxes. Since you don’t have an employer withholding taxes, you must pay for Medicare and Social Security taxes yourself. As of 2023, the self-employment tax rate is 15.3%.
To pay self-employment taxes, you must have a valid Social Security number or individual taxpayer identification number (ITIN).
Saving for Side Hustle Taxes
Now that you know the importance of preparing to pay side gig taxes, here are a few tips to help you streamline the saving process:
- Maintain financial records: Keep accurate and detailed records of your income and expenses. This will help you to estimate how much you owe and properly apply deductions. Programs like QuickBooks, Wave, or FreshBooks are easy-to-use and cost-effective ways to manage your side gig records.
- Consistently set aside funds: A good rule of thumb is to set aside 20% to 35% of your side hustle income for taxes. If you aren’t sure exactly how much you’ll need, aim for a higher, more conservative percentage.
- Break up your payments: If paying taxes as a lump sum each quarter seems intimidating, instead, make monthly payments to spread out the expense over time.
Preparing to file taxes for side business income
You know that preparing for side gig taxes is important. But what steps can you take to ensure you’re ready for tax season? Here’s what you need to know:
Know Your Tax Deadlines
Take note of quarterly tax deadlines. According to the IRS, here are the important dates for 2023 to keep in mind. Remember that you can pay more frequently than these four dates, but paying less frequently could result in late fees.
| Payment Period | Tax Due Date |
| January 1-March 31, 2023 | April 18, 2023** |
| April 1-May 31, 2023 | June 15, 2023 |
| June 1-August 31, 2023 | September 15, 2023 |
| September 1-December 31 | January 15, 2024 |
| *Typically, the tax deadline is April 15. But April 15, 2023, falls on a Saturday, and Monday, April 16, is the District of Columbia’s Emancipation Day holiday, so the tax deadline was pushed to April 18. | |
Keep a Separate Bank Account For Your Side Hustle
Even if you only earn a small amount of money from your side hustle, opening a
separate bank account can be a smart decision. It makes tracking your income and business expenses easier and prevents mixing up your personal expenses with business charges.
Record Your Payments
Your side hustle is a business, even if you only do it occasionally. As such, you should treat it like a business and maintain detailed records. Come up with a system for organizing and tracking the following information:
- Receipts
- Client invoices and payments
- Bank statements
- Insurance information
- State or county permit and licensing details
Research Deductions
If you have a side hustle, you may be eligible for valuable tax deductions that reduce your taxable income. For example:
- Business mileage: If you use a car for your side gig, you can deduct the cost of business use. Most people opt for the standard mileage rate to determine the deduction.
- Home office: If you have a home office that you exclusively use for your side hustle, you may be able to qualify for the home office deduction. With the simplified option, you can deduct $5 per square foot of the portion of the home used for business, up to a maximum of 300 square feet.
- Supplies and tools: You can deduct the cost of tools, supplies, and other expenses from your business income. View IRS Publication 535 for more information on allowable business expenses.
Consult a Tax Professional
Whether you’re relatively new to side hustles or have been working for years, handling self-employment and taxes can be overwhelming. An experienced tax professional can be invaluable, preventing you from filing incorrectly or underpaying your taxes.
You can find a tax professional near you through the IRS’ database of credentialed federal tax preparers.
Tips for Reducing Taxable Income From a Side Hustle
Side hustle taxes can take up a significant portion of your earnings. However, you can minimize the impact of taxes with these three tips:
- Keep track of expenses: With a side gig, it’s easy to forget how much money you spend to keep your business going. Whether you need to buy cooler bags to deliver groceries or get a separate phone line to talk to clients, those expenses can add up. Keeping track of your expenses will allow you to deduct those expenditures on your taxes.
- Pay on time: Not paying your taxes by the quarterly deadlines can lead to extra penalties, so pay on time to reduce your tax bill. The IRS makes it easy; you can pay your taxes online through IRS Direct Pay.
- Take advantage of deductions and credits: Tax deductions can help reduce your taxable income, and tax credits can reduce your tax bill.
What Forms Do You Need to File Taxes for a Side Hustle?
Every situation is different. Depending on your side hustle, you may need a combination of forms. If you do freelance work or have a side gig through a company, you may receive one of the following forms:
- Form 1099-K (Payment Card and Third Party Network Transactions):For those that received payments through payment cards or third-party networks like Venmo or Zelle.
- 1099-NEC (Nonemployee Compensation): For freelancers or contractors
- Form W-2 (Wage and Income Statement): For part-time or full-time employees
When you’re ready to pay your taxes or file your tax return, you may need the following:
- Schedule C (Profit or Loss from a Business): The Schedule C is what you use to report your side hustle income or losses during the tax year
- Schedule SE (Self-Employment Tax): This form is what you use to calculate your self-employment taxes.
- Form 8829 (Expenses for Business Use of Your Home): If you plan to claim the home office tax deduction, you’ll have to complete Form 8829.
- Form 1040/Schedule 1 (Additional Income and Adjustments to Income): Other sources of income, such as earnings that you made outside of a side gig app, are reported on this form.
Bottom Line
Now that you know how to pay taxes on a side hustle, you can plan for the upcoming tax deadlines. Keeping good records and setting aside a portion of all incoming earnings can help you avoid surprises or unexpected penalties.
If you need help, consider meeting with a tax professional and financial advisor. They can help you get your finances and business accounts in order.
