Do You Have to Pay Taxes on Side Hustles?

Earning income from a side hustle, whether through freelance work, gig economy apps, or selling goods online, introduces tax responsibilities that differ from those of a traditional W-2 employee. This income is subject to both income tax and self-employment taxes. Understanding the rules that govern this type of earnings is important to remaining compliant with federal tax obligations. This guide covers identifying taxable income, calculating net earnings, and meeting payment deadlines.

Identifying Taxable Side Hustle Income

The Internal Revenue Service (IRS) operates on the principle that all income is taxable unless a specific provision in the law exempts it. This means that money, property, or services received through your side hustle must be reported. You are required to file a tax return if net earnings from these activities reach $400 or more, and this responsibility remains even if you do not receive a Form 1099.

A primary step is to determine whether your side hustle qualifies as a business or a hobby, as the tax treatment is significantly different. A business is an activity carried on to generate a profit, while a hobby is pursued for pleasure. If the activity is a hobby, you must report the income but cannot deduct associated expenses. The IRS uses several factors to distinguish between a business and a hobby:

• Whether you conduct the activity in a businesslike manner by keeping detailed books and records
• The amount of time and effort you invest
• Whether you depend on the income for your livelihood
• Your expertise in the activity
• Any changes you make to improve profitability
• Your history of income or losses with respect to the activity

An activity is presumed to be a business if it has been profitable in three of the last five consecutive years.

Calculating Net Earnings with Deductible Expenses

Once your side hustle is identified as a business, you pay tax on your net earnings, not your gross income. Net earnings are calculated by subtracting the costs of running your business from your total revenue. These deductible costs are defined by the IRS as expenses that are both “ordinary” and “necessary” for your trade or business. An ordinary expense is one that is common in your industry, while a necessary expense is one that is helpful and appropriate. This calculation is formally reported on Schedule C, Profit or Loss from Business.

A significant deduction for many is the home office deduction, available if you use a part of your home exclusively and regularly for your business. You can calculate this deduction using either the simplified method, which allows a deduction of $5 per square foot up to 300 square feet, or the regular method, which involves calculating the percentage of your home used for business and applying it to actual home expenses like mortgage interest and utilities.

Other common deductible expenses include supplies, marketing costs, and professional development. If you use your vehicle for business purposes, you can deduct the associated costs using either the standard mileage rate, which for 2025 is 70 cents per mile, or by tracking the actual expenses of using your car. Meticulous records, such as a mileage log detailing the date, purpose, and miles for each business trip, are required to substantiate this deduction.

Understanding Your Tax Liability

Your total tax liability consists of two components: self-employment tax and federal income tax. These taxes are calculated based on the net profit figure from your Schedule C. The first component is the self-employment tax, which covers your contributions to Social Security and Medicare. As a self-employed individual, you are responsible for paying both the employee and employer portions. The self-employment tax rate is 15.3%, which is composed of a 12.4% tax for Social Security and a 2.9% tax for Medicare.

This 15.3% rate is not applied to your entire net earnings. First, you calculate your taxable earnings by multiplying your net business profit by 92.35%. The Social Security portion of the tax only applies up to an annual income limit, which is $176,100 for 2025, while the Medicare portion applies to all of your net earnings. To lessen the burden, you can deduct one-half of your total self-employment tax paid as an adjustment to your income.

The second component is federal income tax. Your net earnings from self-employment, after the deduction for one-half of your self-employment tax, are added to any other income you may have. This combined total becomes your adjusted gross income (AGI), and your final taxable income is taxed according to the federal income tax brackets. The self-employment tax is officially calculated on Schedule SE, Self-Employment Tax.

Meeting Your Tax Payment Obligations

Because taxes are not automatically withheld from side hustle income, you are responsible for paying them throughout the year. The U.S. tax system is “pay-as-you-go,” which for self-employed individuals means making quarterly estimated tax payments. If you anticipate owing $1,000 or more in tax for the year, you are required to make these payments.

You can use Form 1040-ES, Estimated Tax for Individuals, to estimate your expected income and deductions for the year to determine your tax liability. This total is divided by four to determine your quarterly payment amount. The payment due dates are April 15, June 15, September 15, and January 15 of the following year. Payments can be made online through IRS Direct Pay, by card, or by mailing a check with a payment voucher.

In addition to quarterly payments, you must file an annual tax return on Form 1040. This return formally reconciles your business activity for the year. The net profit from your Schedule C and the tax from your Schedule SE are reported on your Form 1040. The total of your estimated tax payments is then subtracted from your total tax liability to determine if you owe additional tax or are due a refund.