Updated October 2026
Side hustle taxes surprise many people because nothing is withheld from your freelance, delivery or online sales income. This guide explains, in plain language, how side income is taxed in the United States in 2026, how much to set aside from every payment and the steps to file correctly. It is general information, not tax advice; check IRS.gov or a tax professional for your situation.
How side hustle income is taxed
If you earn money from a side hustle as an independent contractor or small business, the IRS treats it as self-employment income. You owe two kinds of tax on your net profit (income minus deductible expenses):
Comparison: side hustle taxes
| Situation | Rule | What applies | Note |
|---|---|---|---|
| Net earnings under $400 | No SE tax | Income tax may still apply | Report as income |
| Net earnings $400+ | Schedule C + SE | 15.3% SE tax + income tax | File by April 15 |
| Expected tax owed $1,000+ | Quarterly estimates | Pay 4× per year | Apr/Jun/Sep/Jan |
| Payment app / marketplace sales | Form 1099-K | Watch reporting threshold | Keep sales records |
| Client pays you $600+ | Form 1099-NEC | From each client | Due to you by Jan 31 |
- Federal income tax at your normal bracket, because side income is added to your wages.
- Self-employment (SE) tax of 15.3% (12.4% Social Security up to the annual wage base plus 2.9% Medicare) on 92.35% of net earnings, once net earnings reach $400.
State and sometimes city income taxes apply on top, depending on where you live. You can deduct half of your SE tax when calculating income tax.
The $400 rule
If your net earnings from self-employment are $400 or more in a year, you must file a tax return and Schedule SE, even if your total income is otherwise below the filing threshold. Below $400 you do not owe SE tax, but the income is still taxable and must be reported.
Forms you will see: 1099-NEC and 1099-K
Clients who pay you $600 or more in a year for services generally send a Form 1099-NEC. Payment apps and online marketplaces send a Form 1099-K when your payments cross the federal reporting threshold. Reporting thresholds have changed several times recently, so confirm the current figure on IRS.gov. Important: income is taxable whether or not you receive a form. Selling personal items for less than you paid is not taxable profit, but keep records in case a 1099-K reports those sales.
How much of your side income to set aside
A practical rule: move 25–30% of every side hustle payment into a separate savings account. Use the lower end if your income is modest and you have large deductible expenses; use 30–35% if you are in a higher bracket or live in a high-tax state.
| Net side profit | SE tax (approx.) | Income tax at 12% bracket | Set aside (≈) |
|---|---|---|---|
| $5,000 | $706 | $558 | $1,260 (25%) |
| $10,000 | $1,413 | $1,115 | $2,530 (25%) |
| $25,000 | $3,532 | $2,788 (more if 22%) | $6,300–$8,000 |
Illustrative federal estimates only; assumes the side profit sits in the 12% bracket after the half-SE deduction. State tax not included.
Quarterly estimated taxes
If you expect to owe $1,000 or more when you file, the IRS expects you to pay during the year. You can either make quarterly estimated payments with Form 1040-ES (usually due in April, June, September and January) or increase withholding at your day job by submitting a new Form W-4, which many full-time workers find easier. Paying at least 100% of last year’s total tax (110% for higher incomes) through withholding and estimates generally protects you from underpayment penalties.
Deductions that lower your side hustle tax
- Software, subscriptions and AI tools used for the business
- Equipment such as a laptop or camera (often deductible in the first year)
- The business share of your phone and internet
- Mileage for business driving (standard mileage rate) or actual vehicle costs
- Platform fees, payment processing fees and shipping
- A home office, if the space is used regularly and exclusively for business
- Courses directly related to improving your existing business skills
Step-by-step: filing your first side hustle return
- Open a separate bank account or card for side hustle money from day one.
- Track every payment and expense monthly in a spreadsheet or bookkeeping app.
- Collect your 1099-NEC and 1099-K forms in January and February and compare them with your own records.
- Complete Schedule C to calculate net profit and Schedule SE for self-employment tax.
- Carry the results to Form 1040 and subtract any estimated payments already made.
- Set your estimated payments or W-4 for the coming year based on this year’s profit.
Common side hustle tax mistakes
- Assuming no form means no tax.
- Mixing personal and business spending, which makes deductions hard to prove.
- Forgetting state tax and local business licenses.
- Not paying during the year and getting a large bill plus penalty in April.
- Deducting personal expenses that are not ordinary and necessary for the business.
Ready to choose a side hustle? Compare ideas in side hustles for full-time workers and free ways to make money online.
Frequently asked questions
Do I have to pay taxes on a side hustle if I make less than $400?
You do not owe self-employment tax below $400 of net earnings, but the income is still subject to income tax and should be reported.
How much should I save for taxes on side hustle income?
Setting aside 25–30% of each payment covers federal income and self-employment tax for most people; more in high-tax states.
Will I get a 1099 for my side hustle?
Clients paying $600+ usually issue a 1099-NEC, and payment platforms issue a 1099-K above the reporting threshold. Income is taxable even without a form.
Can I deduct my phone and internet?
Yes, the percentage you use for the business is deductible. Keep a reasonable record of business use.
Is this legit or a scam?
Everything listed is legal work or a real business model. Red flags are any "opportunity" that asks you to pay upfront for training, tasks or a "deposit", or that guarantees income.
