Side Hustle Taxes: Step-by-Step Guide on How to Manage Them

Side hustle taxes—the taxes you owe on income earned from freelancing, gig work, or other side hustles—are an essential part of managing additional income. Whether your side hustle earnings are higher or lower than your primary income, paying taxes on this extra income is non-negotiable.

In this article, we’ll be using the term "side hustle taxes" to refer to self-employment or income taxes on additional earnings. We’ll also share tax tips for side hustlers and show you how tools like online pay stubs, W-2s, 1099s, and invoice generators can help you stay on top of your finances.

Let’s break down the key aspects of side hustle taxes.

Key Takeaways

• Side hustles are jobs that you do in addition to your main job and require less dedication and time to complete. They also require you to calculate, report, and pay taxes.
• The main difference between a hobby and a side hustle is that you don’t treat the former as a business and don’t expect to generate income; it’s the opposite for side hustles.
• To successfully manage and organize your taxes, you should keep a record of your income, determine your obligations, deduct your costs, and estimate and pay quarterly tax using a suitable tax form.
• For maximum leverage, you can also keep up with all your tax records, open a separate checking account, put some tax funds aside, and use tax calculators and other tools.

What Are Side Hustles?

Side hustles are jobs that you do to get extra income in addition to your main job. For example, you can have a freelance job aside from being a regular employee in your company. This means that you can be an independent contractor, work “on call” and be on demand, or simply be a temporary worker.

Even though such jobs aren’t full-time and may not bring a lot of earnings, reporting side income to the IRS is a must. Knowing about your tax duties and fulfilling them can help you avoid penalties and other tax repercussions.

Looking into how side hustles work, we can figure out that they generate 1099 rather than W-2 income. In the 1099 vs. W-2 income comparison, the former is a tax form for independent contractors, while the latter is for full-time employees.

Both 1099 and W-2 employees need to file their tax forms before a set date. What’s different is that 1099 tax forms do not show withheld taxes (e.g., Social Security and Medicare), whereas the W-2 forms do. Additionally, W-2 employees pay shared FICA taxes (50-50), and 1099 employees pay them in full.

Is it a Side Hustle or a Hobby?

In the broadest sense, a side hustle is a job you do to make additional earnings, while a hobby relates to an activity you do for fun and are fond of. However, these two can sometimes overlap.

Here are some of the most important questions to help you distinguish between the two:

• Do you perform your activity in a business-related fashion?
• Do you keep records and maintain books?
• Is your intention to make a profit?
• Is the aim of your work to increase profitability?
• Does your livelihood depend on the income you get from your activity?
• Has your activity yielded a profit in recent years
• Do you promote the activity that you do?
• Do you hire professional advisors or other experts from the same branch?
• Have you ever done any activities with similar expertise before?
• Can your activity pave the way for making a profit in the future?

Unless the questionnaire clearly points to your hobby, it is time to focus on “side hustle” tax payment and management.

Side Hustle Taxes: Step-by-Step Guide on How to Pay and Manage Them

Paying and managing side hustle taxes is easier with a couple of crucial steps, such as keeping track of all of your income and estimating quarterly taxes.

So, let’s check the five main aspects of “side hustle” tax regulation you should keep in mind if you wish things to go smoothly.

Step 1: Track All Your Income

The first thing you need to do is track your income using tools like online invoice generators. These tools are especially helpful for keeping a clear record of all payments you receive. It’s important to stay current and not miss any income gained during any pay period.

Another reason why tracking your income is vital is deductions.

For instance, “side hustlers” like Uber drivers and individuals who sell their crafts and arts on Etsy should maintain a clear overview of their income to accurately deduct expenses such as gasoline, repairs, shipping costs, materials, and more.

Step 2: Determine Your Tax Obligations

As tax obligations can differ, it is essential that you determine yours before taking any further tax payment steps. Needless to say, one of your primary goals here should be to have the self-employment taxes explained. The category of self-employed people encompasses freelancers, independent contractors, sole proprietors, etc.

One of the side hustle tax rules for self-employed people stipulates a 15.3% tax rate. More specifically, you should pay a 12.4% share for Social Security and a 2.9% rate for Medicare. Importantly, if your earnings from wages, self-employment, or other taxable income exceed $168,600 in 2024, you do not pay Social Security tax on the amount above this threshold.

On the other hand, the 2.9% Medicare rate applies to all of your income, regardless of the amount. There’s even an additional surtax of 0.9% that self-employed people should pay based on their filings.

Step 3: Deduct Expenses

Calculating and making your side hustle tax deductions is another step towards your final tax amount. Deductions are all the costs directly and indirectly related to your side hustle.

The most common expenses, some of which are also deductions for freelancers, are:

• Travel and mileage expenses
• Internet and phone bills
• Tools and software
• Shipping costs
• Home office expenses
• Materials

To have it all in one place, it’s essential for you to keep receipts (be they printed or online) and to use software to track your side hustle expenses. This way, you won’t miss any important costs for lowering your total tax amount.

Step 4: Estimate and Pay Quarterly Taxes

The penultimate step for regulating side hustle taxes is to use the 1040-ES to determine an estimated tax. As mentioned, you must have all your incomes, deductions, and credits together in a single place.

It is suggested that you start with all the aforementioned parameters from the previous year. You can use the Form 1040-ES worksheet to come up with your estimated tax. As a result, you will have the estimated sum of your quarterly tax payments.

Let’s not forget that estimated taxes should not be too high or too low. Knowing how to calculate self-employment tax accurately will help you avoid penalties. The same goes for keeping up with the latest changes in law and your personal changes and making proper adjustments accordingly.

Step 5: File the Right Tax Forms

Picking the right tax form and sending the income information through the Electronic Federal Tax Payment System (EFTPS) or via email is the final step to managing your side hustle taxes.

Depending on the type of your side hustle, you may need to complete one of the many tax forms, such as:

• Schedule C. This is one of the tax forms for gig workers, sole proprietors, and independent contractors, made for reporting incomes and losses.

• Schedule-SE. You can use this form to report yearly taxes for Social Security and Medicare.

• Form 1040-ES. Sole proprietors, single LLCs, and others can use this form to report taxes if their estimate is to owe more than $1,000 for one year.

• 1099-K. This is the form for reporting incomes obtained from marketplaces, credit, debit, gift cards, payment apps, etc., if your income is higher than $5000 in 2024.

• Form 1099-NEC. You will get this form if you made a payment of a minimum of $600 to a non-employee for business-like services or if you offered services to a client.

3+ Tips and Best Practices for Side Hustle Taxes

Paying side hustle taxes doesn't have to be overwhelming. With the right tools, like Paystubs.org builders, our tips and best practices, and a well-organized approach, you can streamline the process.

Let’s explore some essential tips to make it quick and hassle-free.

#1. Keep Track of Your Records

First and foremost, we recommend that you keep up with your tax records at any time. Monitoring every transaction and knowing its date and amount is essential for seamless side hustle tax paying.

#2. Open a Separate Checking Account

Creating a distinct checking account that isn’t related to your main job is an efficient way to have a transparent outline for future tax payments. This is because your separate account is made for your side hustle only. Therefore, all payment lists tell you about your income or expenses.

#3. Put Funds for Your Taxes Aside

Another pro tip for you is to take a certain amount of money you get and set it aside for taxes. By doing this, you won’t have to worry about having insufficient funds to pay taxes later on.

#4. Use Website Tools for Calculation and Management

Instead of calculating your taxes manually, you can turn to tools like a W-2 generator, a 1099 generator, and many others and have your taxes calculated quickly and easily. Apart from that, you can read about numerous helpful topics on taxes and organizing your finances on this site.

Final Thoughts

Side hustling is a popular practice that helps many employees gain extra income. Calculating, reporting, and paying taxes are of great importance for any side hustle. It helps employed individualsavoid any repercussions that may come up due to irregular tax payments.

What’s more, employees can find plenty of tools for tax calculation on our website. Plus, taxpayers can read advice on finances, use payroll calculators, and more.

Side Hustle Tax FAQ

Do I need to report side hustle income under $600?

No matter the amount, you need to report every side hustle income (including the ones under $600). Despite this, you may not need to pay taxes for some income (usually below $600).

What happens if I don’t pay self-employment tax?

Not paying self-employment taxes can lead to penalties you will have to pay. Penalty value can be different depending on how much time has passed since going over the deadline.

Can I deduct my car expenses for gig work?

Yes, you can deduct car expenses for gig work. When paying side hustle taxes, one of the cost types certainly involves such expenses (mileage, repairs, etc.).

When are quarterly taxes due?

Quarterly taxes are due April 15 for incomes from January 1 to March 31 and June 15 for earnings from April 1 to June 31. Also, the due date for paying taxes for incomes between June 1 and August 31 is September 15, while the earnings obtained from September 1 to December 31 should be paid before January 15.

How can Paystub.org help with tax documents?

Paystub.org can help with tax documents in many ways, one of which is by offering tools for calculating taxes. Moreover, this website provides different tax forms and tips for a variety of financial topics.