Side hustle taxes: Everything you need to know in 2024 (2024)

A side hustle is a great way to bring in extra income outside your regular job. But, just because you’re earning a little extra cash on your terms doesn’t mean you aren’t responsible for paying income taxes — even if it’s only a few hundred dollars per year.

Whether you’re opening your own Etsy shop, working for a rideshare company or freelance writing, chances are, if you’re making extra income, you’re required to report it on your income tax return.

In this guide, we look at the requirements for paying income tax on your side hustle, how to keep accurate records, what deductions you can claim and how and when to pay your income taxes.

Do I have to pay taxes on a side hustle?

The IRS states that if you make $400 or more in net income from a side hustle, you must file a tax return, regardless of whether or not you received a 1099 from the company that paid you. This can complicate tax filings for workers who are used to employers withholding taxes, then sending them a W2 at the beginning of each year.

Key tax considerations for side hustlers

Thinking about starting a side hustle? Here are key considerations to pay attention to as you decide:

Filing thresholds

While it may be tempting to dismiss the need to file taxes on your income selling a few art pieces or tutoring your neighbor’s sixth grader on nights and weekends, the IRS still requires you to file a return on net income of $400 or more. By contrast, if Junior’s lemonade stand only raked in a couple hundred dollars after expenses, he’ll be fine not filing.

Record keeping

One of the best things about having a side hustle is that you’re your own boss. That also means you need to keep good expense records and set aside the appropriate amount of your net income to pay income taxes each quarter.

Remember to keep expense receipts and invoices. If you’re paying expenses from a business bank account, keep those statements, too.

After expenses are accounted for, ensure you’re setting aside enough funds to cover all owed Social Security, Medicare and income taxes. Remember that your side hustle doesn’t come with an employer covering half of your contributions like a full-time job would.

Hobby or business classification

If your side hustle can be classified as a hobby, you may not have to pay taxes on its earned income. The IRS explains that your side hustle may be a hobby if:

• The time and effort you put into the activity aren’t intended to be profitable.
• You don’t expect to profit from the assets you use to operate.
• You don’t have the knowledge to operate a successful business.
• You haven’t made a profit from similar activities in the past.
• You don’t improve the business to increase its profitability.
• You don’t operate in a business-like manner with records of losses and expenses.

Contact a tax professional if you suspect your activity can be classified as a hobby. The tax professional will be able to confirm your activity is classified as a hobby and inform you of the next steps in reporting your profits and losses for a hobby.

Hassle evaluation

Like any business, expenses and taxes can rack up fast. Evaluate your side hustle to ensure it’s making a profit. This means analyzing the gross pay you expect to bring in minus all taxes and expenses. Tax calculations should take into account federal, city and state taxes (depending on where you live).

For example, if you’re considering taking a rideshare gig, factor in the cost of gas, vehicle maintenance, mileage, estimated delivery time and tax withholdings to determine if the estimated pay-per-delivery will be worth it in the long run.

What can I deduct on a side hustle?

Knowing how to deduct certain expenses from your side hustle helps you avoid paying more taxes than you owe. While these expenses vary depending on the details of your side gig, the IRS defines a business expense as one that is both ordinary and necessary.

Let’s use the above rideshare gig as an example. When operating this side hustle, you can only deduct the portion of car maintenance or mileage that directly relates to your work. In this case, consider using a mileage-tracking app. You can turn it on for your side job and off when driving to your nine-to-five, doctor appointments and other non-gig-related destinations. Then, claim the mileage in your app for your deduction.

Likewise, if you’re selling arts and crafts on Etsy, your cost of materials, tools and necessary production equipment, home office space and shipping and handling costs are the types of qualifying deductions you should track and report.

Here is a list of the most common side hustle deductions:

• Business-related car mileage.
• Dues and subscriptions paid for memberships to business associations.
• Tools and equipment needed to do the job.
• Training and educational expenses for building the skills needed for your side hustle.
• For home-based businesses, a portion of your mortgage, phone, internet and utility bills, are all calculated based on the size of your dedicated office space and amount of business usage.
• Preparatory expenses to launching your business (such as creating a business plan or doing market research).
• Office equipment, such as furniture, printers, computers and more.

What tax forms do I need to file for a side hustle?

The tax forms you should file for your side hustle depend on the type of side work you’re doing, where you live and your business’s operational activities. Here are some common tax forms you may need to file for your side hustle taxes:

• Form 1040-ES: This form is used to pay estimated taxes if you’re operating as an individual (for example, as a sole proprietorship or single-member LLC) and expect to owe at least $1,000 for the year. If you’re not paying online, fill out one of the included vouchers each quarter and mail it in with your estimated tax payment.
• Form 1099-NEC: This form should be used if you paid at least $600 to a nonemployee who rendered you business-related services (i.e., a personal assistant or a lawyer). You may also receive one of these forms from a client for whom you’ve rendered services; in this case, the amount it indicates should be reported when filing your annual income tax return.
• 1099-K: This form is issued to you if you received payments of $600 or more from a payment app or online marketplace, including sites set up for the sale of resale items, auction sites, craft or maker marketplaces, real estate marketplaces, freelance marketplaces and car sharing or ride-hailing platforms.
• Schedule C: Use this form to report your income and losses from a sole proprietorship side hustle.
• Schedule SE: Use this form to report the Social Security and Medicare taxes you paid throughout the year.

Keep in mind that if a client does not send you a 1099, it doesn’t mean you’re off the hook for income taxes. You must keep your own income and expense records so you can report your earnings.

In addition, if you live in a state that collects income taxes, you likely also need to file state tax returns annually and pay estimated taxes quarterly. Visit your state’s department of taxation website to learn more about state requirements and necessary tax forms.

How to calculate estimated taxes

While traditionally employed workers pay half of their Social Security and Medicare taxes, self-employed individuals pay the full amount for both. For 2023, the percentages are 12.4% Social Security tax on earnings up to $160,200. For Medicare, the cost is 2.9% of all earnings for self-employed workers.

You should also consider local, city and taxes you may owe based on where you live and work. For example, seven states in the US — Wyoming, Texas, Tennessee, South Dakota, Nevada, Florida and Alaska — don’t have a state income tax. Two additional states, New Hampshire and Washington, only tax income on investments and capital gains of high earners.

You can expect to pay less taxes to your state than to the federal government. For example, income tax rates in Virginia fall between 2% and 5.75% of taxable income, and the income tax rate in Colorado is 4.4%. In contrast, in Texas, the income tax rate is 0%. Most states require you to pay quarterly estimated taxes as you do at the federal level.

To learn more about state income tax rates and to obtain vouchers for quarterly estimated taxes, visit your state’s department of taxation website. Many offer tax tables you can use to determine your tax rate against your income bracket.

Tip: One way to take the burden of calculating and paying estimated taxes off your shoulders is to request your full-time employer withhold more of your earnings to cover your side gig tax obligations. To arrange this, use the IRS’s tax withholding estimator to determine how much extra you need your employer to withhold, then fill out a new W-4 form to request the change (in section 4) and give it to your employer.

Record-keeping tips for side-hustle taxes

The responsibility to keep and maintain accurate side-hustle tax and expense records is yours and yours alone. So, consider the following tips for staying ahead of your side hustle’s record-keeping needs:

Download an expense-tracking app

An expense tracker helps you track your expenses from your smartphone, so when it’s time to claim deductions, you’re not stuck ruffling through boxes of old receipts (many of which are printed on thermal paper and will fade over time). Apps like Everlance and Zoho Expense are easy to use, affordable and can help you stay organized.

File and pay quarterly estimated taxes

Waiting an entire year to file your side hustle tax return can result in a large tax burden and penalties for missing quarterly tax deadlines, in addition to overwhelming circ*mstances as you sift through a year’s worth of expense records. Tackling this obligation in bite-sized quarterly chunks makes the process much easier.

So, familiarize yourself with IRS Form 1040-ES, Estimated Taxes for Individuals. This form walks you through your expected income subject to self-employment taxes, current tax rate schedules, qualifying deductions and when quarterly payments are due throughout the year. Qualifying taxpayers can use the IRS’s electronic federal tax system to pay quarterly estimated taxes and schedule payments in advance.

Open dedicated bank accounts

While you should keep invoices and receipts for business expenses, opening a bank account strictly for paying business expenses and one for setting aside and paying estimated taxes creates a paper trail that doubles as automated expense tracking. This will come in handy if you ever need to prove your expenses or quarterly tax payments.

Frequently asked questions (FAQs)