How Side Hustle Income Is Taxed: 1099s and Self-Employment Tax
In this guide
- Is side hustle income taxable?
- The two taxes on side income
- Example: $15,000 of side income
- Will you get a 1099?
- Quarterly estimated taxes
- Deductions that lower your side hustle taxes
- Retirement accounts for side income
- A simple tax system for side hustlers
- Example: a full year of side income
- Frequently asked questions
- Plan before the money arrives
The first time a side hustle pays off, it feels like pure extra money. Then tax season arrives, and many people discover they owe far more than expected, sometimes with penalties. The reason is usually the same: side income has no taxes withheld, and self-employment income carries an extra tax most W-2 employees never think about.
This guide explains how side hustle income is taxed, how to estimate what you’ll owe, when to make quarterly payments and which deductions can lower your bill.
Is side hustle income taxable?
Yes. All income is taxable, whether you’re paid through an app, by check, in cash or through a payment platform, and whether or not you receive a tax form.
For most side hustles, you’re considered self-employed (an independent contractor or sole proprietor), not an employee. That means:
- No income tax is withheld from your payments
- You owe self-employment tax in addition to income tax
- You may need to make quarterly estimated tax payments
- You can deduct legitimate business expenses
If you earn $400 or more in net self-employment income in a year, you generally must file a tax return and pay self-employment tax.
The two taxes on side income
1. Federal (and state) income tax
Your net side income (earnings minus business expenses) is added to your other income and taxed at your marginal tax rate. If your salary already puts you in the 22% bracket, each extra dollar of side profit is generally taxed at 22% federally, plus any state income tax.
2. Self-employment tax
Employees pay 7.65% for Social Security and Medicare, and their employer pays another 7.65%. When you’re self-employed, you pay both halves:
| Component | Rate |
|---|---|
| Social Security | 12.4% (on combined wages and self-employment earnings up to $184,500 in 2026) |
| Medicare | 2.9% (no limit) |
| Total self-employment tax | 15.3% |
The tax applies to 92.35% of your net self-employment earnings. You can deduct half of your self-employment tax when calculating your income tax.
Example: $15,000 of side income
Jordan earns a salary in the 22% federal bracket and makes $15,000 in net profit from freelance design.
| Step | Amount |
|---|---|
| Net self-employment earnings | $15,000 |
| × 92.35% | $13,853 |
| Self-employment tax (15.3%) | $2,119 |
| Deduction for half of SE tax | $1,060 |
| Income subject to income tax | $13,940 |
| Federal income tax at 22% | $3,067 |
| Total federal tax on side income | About $5,186 |
That’s about 35% of Jordan’s side profit, before any state income tax. This is why many tax professionals suggest setting aside 25–35% of side income for taxes.
Simplified example. Your result depends on your total income, deductions, credits and state.
Will you get a 1099?
Clients and platforms may send forms reporting what they paid you:
| Form | When you typically receive it |
|---|---|
| 1099-NEC | A business paid you $2,000 or more for services in 2026 (the threshold was $600 for earlier years) |
| 1099-K | Payment platforms and marketplaces, generally when payments exceed $20,000 and 200 transactions in a year |
| 1099-MISC | Certain other payments, such as rents or prizes |
Not receiving a form doesn’t mean the income isn’t taxable. Track every payment yourself.
Personal payments aren’t income. Splitting a dinner bill or receiving money from a friend through a payment app isn’t taxable income. Keeping business and personal payments separate makes this clear.
Quarterly estimated taxes
Because no taxes are withheld from side income, the IRS expects you to pay throughout the year using estimated payments (Form 1040-ES) if you expect to owe $1,000 or more when you file.
| Payment for income earned | Due date |
|---|---|
| January 1 – March 31 | April 15 |
| April 1 – May 31 | June 15 |
| June 1 – August 31 | September 15 |
| September 1 – December 31 | January 15 of the following year |
If a date falls on a weekend or holiday, the deadline moves to the next business day.
The safe harbor rule
You can generally avoid underpayment penalties if your total payments (withholding plus estimated payments) cover at least:
- 90% of this year’s tax, or
- 100% of last year’s tax (110% if your prior-year AGI was above $150,000)
The easy alternative for W-2 employees
If you also have a regular job, you can increase withholding from your paycheck by updating your W-4 to cover your side income tax. Withholding is treated as paid evenly throughout the year, which can be simpler than quarterly payments. The IRS Tax Withholding Estimator can help. Read how to read your paycheck for more on withholding.
Deductions that lower your side hustle taxes
You can deduct expenses that are ordinary and necessary for your business. Common examples:
| Expense | Notes |
|---|---|
| Equipment and software | Computers, cameras, design or accounting software used for the business |
| Home office | Must be used regularly and exclusively for business |
| Business mileage | Track miles driven for business using the IRS standard mileage rate, or actual expenses |
| Phone and internet | Only the business-use percentage |
| Supplies and materials | Inventory, shipping, packaging |
| Platform and payment fees | Fees taken by marketplaces and payment processors |
| Marketing | Website, ads, business cards |
| Education | Courses that maintain or improve skills for your current business |
| Professional services | Tax preparation for the business portion, legal fees |
Keep records. Save receipts and a mileage log. Many people use a separate bank account and card for side hustle income and expenses, which makes bookkeeping and tax time much easier.
You report self-employment income and expenses on Schedule C and calculate self-employment tax on Schedule SE, both filed with your Form 1040.
Retirement accounts for side income
Self-employment income opens extra tax-advantaged savings options:
- SEP IRA: contribute up to 20% of net self-employment earnings (after the SE tax deduction), subject to an annual limit.
- Solo 401(k): contribute as both “employee” and “employer,” but your employee contributions share the $24,500 limit with your day-job 401(k).
These contributions can reduce your income tax while building retirement savings. See how a 401(k) works for more on limits.
A simple tax system for side hustlers
- Open a separate checking account for side income and expenses.
- Move 25–35% of every payment into a savings account labeled “Taxes.”
- Track expenses monthly in a spreadsheet or bookkeeping app.
- Pay estimated taxes quarterly or adjust your W-4 withholding.
- Review your numbers mid-year and adjust if income changes.
Example: a full year of side income
Riley earns $82,000 at a day job and starts freelance video editing on the side. Here’s a simplified year:
| Item | Amount |
|---|---|
| Freelance revenue | $18,000 |
| Platform and payment fees | −$1,500 |
| Software subscriptions | −$600 |
| New laptop (used 100% for the business) | −$1,800 |
| Business share of internet and phone | −$400 |
| Net profit (Schedule C) | $13,700 |
| Self-employment tax (15.3% of 92.35% of net profit) | About $1,936 |
| Deduction for half of SE tax | About $968 |
| Federal income tax on the remaining profit at 22% | About $2,801 |
| Estimated federal tax on side income | About $4,737 |
Riley set aside 30% of revenue ($5,400) in a tax savings account throughout the year, which comfortably covered the federal tax and left a cushion for state tax.
How Riley handled payments
Instead of making quarterly estimated payments, Riley increased federal withholding at the day job by about $180 per biweekly paycheck using a new W-4. That added roughly $4,700 in withholding over the year. Because withholding counts as paid evenly through the year, Riley avoided underpayment penalties without tracking quarterly deadlines.
Records Riley kept
- A spreadsheet of every payment received, with client name and date
- Receipts for the laptop and software, saved in a cloud folder
- A note of the business-use percentage for internet and phone and how it was calculated
- Copies of any 1099-NEC or 1099-K forms received, reconciled against the spreadsheet
Good records turn tax season into a one-evening task and make it much easier to answer any question the IRS might raise later.
Frequently asked questions
Do I have to pay taxes on side hustle income under $600?
Yes. The $600 (now $2,000) threshold applies to when businesses must send you a 1099, not to whether income is taxable. If your net self-employment income is $400 or more, you generally owe self-employment tax as well.
Can I deduct expenses if my side hustle lost money?
Generally yes, if it’s a genuine business operated to make a profit. A loss can offset other income. If you consistently lose money, the IRS may consider it a hobby, and hobby expenses aren’t deductible.
Do I need an LLC to deduct business expenses?
No. Sole proprietors can deduct business expenses on Schedule C. An LLC doesn’t change your federal taxes by default.
What if I forgot to make estimated payments?
Make a payment as soon as possible to reduce penalties, and adjust for the rest of the year. Penalties are calculated based on how much was underpaid and for how long.
Is gig work like rideshare or delivery taxed the same way?
Yes. Gig workers are typically independent contractors, so income tax and self-employment tax apply, and vehicle expenses or mileage can usually be deducted.
Plan before the money arrives
Side hustle income is subject to income tax at your marginal rate plus 15.3% self-employment tax on most of your net earnings. Set aside 25–35% of every payment, pay quarterly estimated taxes or increase your paycheck withholding, track deductible expenses and file Schedule C and SE with your return.
Get started: Open a separate account for your side income this week and set up a rule to move part of every payment into a tax savings bucket. If you’re still choosing a side hustle, browse our list of side hustles for full-time professionals.