Life changes
Started a Side Hustle? How Side Income Is Taxed
Reselling, rideshare, freelance design, weekend catering: once you earn money on your own, you are running a small business in the eyes of the IRS. The good news is that your costs count too.
Reviewed by LaToya Clark-Thompson, FounderLast updated
What changes on your return
Income from work you do for yourself goes on Schedule C, where your business expenses are subtracted to reach net profit. That profit is taxed twice over in a sense: regular income tax, plus self-employment tax (Social Security and Medicare for people who work for themselves) on Schedule SE. Self-employment tax kicks in once your net profit passes a low threshold, so even a modest side business usually triggers it.
Because nobody withholds tax from side income, the tax on it is either covered by extra withholding at your day job or by quarterly estimated payments. Our self-employment tax calculator gives a rough sense of the amount.
Forms that may arrive (and why you cannot wait for them)
- Form 1099-NEC from clients who paid you for services; the reporting threshold is higher than it used to be, so smaller clients may not send one
- Form 1099-K from payment apps and marketplaces, which reports gross payments, not profit; the threshold that triggers it was set back to a higher level, so many sellers will not get one
- Form 1099-MISC for some other kinds of payments, such as rents or prizes
All of your side income is taxable whether or not a form arrives. Your own records, not the 1099s, are what the return is built from. If a 1099-K includes personal money, such as friends paying you back for dinner, it has to be handled on the return rather than ignored. Our page on payment apps and 1099-K goes deeper.
Expenses worth tracking from the first day
- Supplies, inventory and the cost of goods you resell
- Platform and payment processing fees
- Business mileage, logged as you go (date, purpose and miles)
- The business share of your phone and internet
- Software, subscriptions and equipment
- A home office, if a space is used regularly and only for the business (see our home office guide)
A separate bank account or card for the side business makes all of this far easier, and it keeps a 1099-K from mixing business and personal money.
Common mistakes
Not reporting income because no 1099 came. Reporting the gross on a 1099-K as profit without subtracting fees and costs. Missing estimated payments, which can bring an underpayment penalty on top of the tax. Calling a hobby a business: if you are not really trying to make a profit, the rules differ and hobby expenses are not deductible. And mixing everything in one personal account until the records cannot be sorted out.
When help is worth it, and what to bring
A first year with a side business is a good time for a preparer, because the habits you set now carry forward. Bring your W-2s, every 1099 you received, a year of income and expense records (a spreadsheet or bank exports is fine), your mileage log and any estimated payment confirmations. Our self-employed tax services cover returns and quarterly planning, and our quarterly tax calculator helps you set aside the right amount as you go. If the side business is turning into the main one, see going from W-2 to 1099 and starting a business.
Frequently asked questions
Do I have to report side hustle income if I did not get a 1099?
Yes. All income from work you do for yourself is taxable, whether or not a client or platform sends a form. The 1099 reporting thresholds only decide when the payer must send one; they do not set a level below which income is tax-free. Report the income from your own records, and subtract the business expenses you can document.
How much should I set aside for taxes on side income?
It depends on your bracket from your day job, your state and how much of the side income is profit after expenses. Remember that self-employment tax applies on top of income tax. A calculator built for self-employment gives a starting estimate, and a preparer can turn it into a quarterly payment amount or a W-4 change at your main job.
Can I increase my W-4 withholding instead of paying quarterly estimates?
Yes. Extra withholding from your day job counts toward your tax just like estimated payments, and it is treated as paid evenly through the year, which can help avoid an underpayment penalty. The W-4 has a line for an extra amount per paycheck. This works well when the side income is steady and your W-2 job is stable.
What if my 1099-K includes money that is not income?
Payment app forms sometimes include personal transfers, reimbursements or sales of personal items at a loss. Those amounts are not business income, but because the IRS received the same form, they should be accounted for on the return rather than simply left out. Keep records showing what each non-business payment was.
Not the question you had? The full tax FAQ covers more ground, and our client reviews say what the work is actually like.
Related pages
You went from W-2 to 1099
Employee to contractor: no withholding, self-employment tax, estimates and new deductions.
Learn moreYou started your first job
First W-2, first W-4, first return. How it works when your parents still claim you.
Learn moreYou started a business
Structure, EIN, licenses, a separate account, books and estimated taxes for a new business, in order.
Learn moreYou lost your job
Unemployment on a 1099-G, severance on a W-2, a cashed-out 401(k) and Marketplace coverage.
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