How To File Taxes for Your Side Hustle

Side hustles have become a regular part of the modern economy, whether through rideshare driving, online freelancing, or selling goods online. However, earning extra income also means handling new tax responsibilities, something many may underestimate until tax season arrives. Understanding how to track, report, and maximize deductions for your side income can help you stay compliant and reduce the risk of surprises when filing.

Know What Counts as Taxable Income

Income from any gig work, freelancing, or self-employment is generally taxable. Whether you’re paid through PayPal, Venmo, Zelle, or direct deposit, those payments are reportable if they’re tied to business activity.

Third-party payment platforms will issue Form 1099-K to anyone exceeding the IRS reporting threshold for business transactions.

Even if you don’t receive a 1099 form because you were paid in cash, via check, or other means, all business income must still be reported. It’s important to note that the IRS distinguishes business income (profit-seeking activity) from hobby income, which is not eligible for business deductions. Before filing your return, be sure to determine what type of income you’ve earned, which will dictate which deductions you’re eligible to take.

Get Organized Before You File

Accurate recordkeeping is key to minimizing stress during tax season. Keep a log of all business-related income and expenses throughout the year. Common documents may include:

• Receipts for supplies and equipment
• Invoices and payment confirmations
• Mileage and travel logs
• Proof of home office expenses (utilities, rent, or mortgage interest)
• Bank statements and credit card summaries

Digital bookkeeping tools like QuickBooks Self-Employed, Wave, or FreshBooks can automate expense tracking and help separate business from personal transactions. Organized documentation ensures you can substantiate deductions if the IRS ever requests verification.

Here’s what one financial professional had to say:

“Leverage technology for tracking business revenues, expenses, assets, and liabilities,” said Mac Gardner, CFP, founder and CEO of FinLitTech. “I’ve used QuickBooks for years, a very complete platform and relatively cost-effective tool for managing cash flow.”

Maximize Deductions and Credits

Deductions reduce your taxable income and can significantly lower your overall tax liability. According to the IRS, common business expenses that may be deductible include:

• Home office expenses if you use a dedicated space regularly and exclusively for work
• Business supplies and equipment, including computers and software
• Utilities, phone, and internet costs related to business activity
• Mileage or vehicle expenses used for business travel
• Advertising and marketing expenses

Lawrence Sprung, CFP, who is a wealth advisor and the founder of Mitlin Financial, explained more about deductions: “Commonly overlooked deductions, which can add up, may include items like mileage, business use of phone and internet, meals and entertainment, and maybe even a home office deduction,” he said. “Be sure you keep receipts for business deductions and track them.”

This is where proper documentation is essential. Be sure to have receipts, digital records, and usage logs to verify your deductions. Additionally, many self-employed individuals may qualify for the Qualified Business Income (QBI) deduction, which allows eligible taxpayers to deduct up to 20% of qualified business income.

Understand Self-Employment Taxes

Self-employed individuals pay both the employer and employee portions of Social Security and Medicare through self-employment tax, which totals 15.3% (12.4% for Social Security and 2.9% for Medicare).

“You are responsible for both the employee and employer taxes as a self-employed business owner,” highlighted Sprung. “When you are a W-2 [employee], you are only responsible for about half of the 15.3% in taxes owed by the employer and employee together. This is all your responsibility when you are self-employed.” 

Unlike W-2 employees, who have these taxes withheld automatically, independent earners must file a number of different forms:

• Form 1040 to file an individual income tax return
• Schedule SE (Form 1040) to calculate self-employment tax
• Schedule C (Form 1040) to report business income and expenses from self-employment
• Form 1040-ES to make quarterly tax payments to avoid underpayment penalties
• 1099-K forms issued by third-party payment platforms for reporting business transactions
• 1099-NEC forms issued by business clients for nonemployee compensation

Here’s an example of how a self-employed individual might calculate their taxes:

Suppose you earned $40,000 from freelance work during the year and had $5,000 in deductible business expenses. Your net self-employment income is $35,000.

Multiply $35,000 by 92.35% (since the IRS taxes 92.35% of your net earnings from self-employment).

$35,000 × 0.9235 = $32,322.50

Then, multiply $32,322.50 by 15.3% (12.4% for Social Security + 2.9% for Medicare) to calculate your self-employment tax:

$32,322.50 × 0.153 = $4,945.34

You would owe approximately $4,945.34 in self-employment tax for the year. Self-employed individuals can deduct half of that (in this case $2,472.67) as an adjustment to their income on Form 1040.

Many side hustlers may file as sole proprietors, which doesn’t require forming a separate business entity. However, those seeking liability protection or other advantages may consider forming a Limited Liability Company (LLC) or other type of tax entity.

Gardner explained that registering your business as an entity, such as an LLC, S-Corp, or C-Corp, as opposed to a sole proprietorship, can provide a layer of protection should you encounter business liabilities. It’s a relatively simple and cost-efficient step that can save you and your business from future losses.

Prepare for Next Year

Planning ahead can prevent headaches when the next tax season arrives. To avoid penalties, set aside funds regularly and make quarterly estimated payments through the IRS.

Freelancers and side hustlers may open a separate savings account solely for taxes and transfer a percentage of each payment they receive. Electing for automatic weekly, biweekly, or monthly transfers from a checking account to a designated savings account can make this process easier to stay on track.

Side hustlers can also take advantage of retirement savings options like a SEP IRA or Solo 401(k). These accounts offer tax-deferred growth and allow for significant annual contributions, reducing taxable income.

The Bottom Line

Managing taxes for your side hustle may seem complex initially, but it becomes manageable with organization, accurate records, and the right forms. Understanding how income is reported, what deductions you can claim, and how to make quarterly payments can help you avoid penalties and save money over time. Ultimately, treating your side hustle like a small business is the best way to stay compliant and financially prepared year after year.