Side hustling is an awesome way to make extra money, and knowing how to handle taxes for your side hustle can help you save time, money, and future frustration.
Many side hustlers find taxes intimidating and confusing, especially if this is your first year reporting. I promise that it’s less overwhelming than you’re expecting, and that’s why I put this guide together -- to demystify side hustle taxes.
You’re going to learn how to track your income and expenses, how much of your income to set aside for taxes, when to pay it, and more. I’m also going to answer common questions that pop up if you’re thinking about your side hustle taxes after the fact.
How to handle taxes for your side hustle
1. Track your income and expenses
The amount you pay in side hustle taxes is based on how much you make, which is why tracking your income is the first thing you need to start doing. But your expenses are also important to note from the beginning because you can claim them as deductions and potentially lower your tax liability.
There are several methods for tracking, and every side hustler will find a way that makes sense for them. I know people who keep track of payments with a paper ledger, but you can also use free software like Google Sheets or Wave. You can use these two to track income and expenses and have that information readily available at tax time.
FreshBooks and TurboTax Self-Employed are really popular paid tax software software. You can file your taxes using those.
You want to track every single dollar that you earn from your side hustle-- cash, checks, PayPal payments, Venmo, bank transfers, wire transfers, etc.
One of the best ways to simplify tracking is to open a dedicated business savings and checking account for your side hustle.
Business checking account
I recommend depositing all of your income in your checking account. That’s PayPal payments, checks, direct deposit can go in this account, etc. You’ll be able to see exactly how much money is coming in each month. You can use this account to pay for and track business expenses, and you can also pay yourself from this account.
Business savings account
Your side hustle savings account is where you can save money for taxes. I’m going to explain how much to set aside shortly, but having a dedicated business account for tax time is extremely helpful. Every time you get paid, you can easily go into your checking account and move a percentage of it over to your savings account. This way you know you’re covered.
When it comes time to figure out your taxes, you can simply look at your bank statement to see how much you made.
What if I have been using my personal bank account?
First of all, don’t stress about it! This is something many side hustlers do in the beginning, myself included.
PayPal tracks your statements if you’re paid through them, and you can go back and download statements and reports for whatever period you need. Some clients or companies, like if you’re a food delivery driver, may send you a 1099 that tracks your income throughout the year.
You can also go back through your personal bank account and search for payments. This can be tedious, but you’ll be ready with business accounts in the future.
2. Set money aside to pay your taxes
When you’re a self-employed side hustler, taxes aren’t automatically taken out of your paycheck. You are now responsible for that, and you should be setting 25% to 30% of your income aside for taxes. This amount includes:
- Self-employment taxes: The self-employment tax rate is 15.3% and consists of two parts: 12.4% for Social Security and 2.9% for Medicare.
- Federal income taxes: This is based on your tax bracket, and your side hustle may push you into a higher bracket, which is why it’s beneficial to set aside so much of your side hustle income.
- State income taxes: This depends entirely on where you live. There are eight states that don’t charge income tax, some that charge a flat rate, and some with progressive rates. If you live in one of the 42 states that charges income tax, it’s anywhere from 0.33% to 13.3%.
When I learned that I needed to set 25% to 30% aside for my taxes, I nearly choked on my coffee. My side hustle was bringing in much needed extra cash, and that percentage felt like a lot.
It’s helpful to understand that self-employment taxes are what you pay because you are both the employer and employee. You may find that you’ve saved too much, but that’s not a bad problem to have. You can invest that back in your side hustle, invest more, put more towards retirement, etc.
What if I haven’t saved that much for tax time?
Depending on how much you earn and what the rest of your financial situation is like, you may find out that you don’t owe that much in taxes. This is especially true if you normally receive a tax refund check.
However, if you didn’t set enough aside and think you’ll owe side hustle taxes, it’s not the end of the world. Here’s what you should do:
- Start setting money aside now. If you can save more than 30% of your side hustle income for taxes that will help you make up for lost time. But any amount you can save for your side hustle taxes will be helpful.
- Still file your taxes on time. The penalty for late payment is 0.5% compared to a 5% penalty for not filing your taxes on time -- it’s better to owe than not file.
How you pay the side hustle taxes you owe will really depend on your financial situation. If you have enough of an emergency fund, you may want to consider pulling money from there. Another option is to set up a payment plan with the IRS, and there’s a set up fee based on the amount you owe.
People with good credit might want to open a credit card with a 0% APR and use it to pay your taxes. However, you will be charged a processing fee of 1.87% to 3.93%, and the 0% APR is only an introductory rate. You’ll only have 12 to 18 months to pay your card before the rate goes up.
The best way to avoid owing in the future is exactly what I’m going to cover next.
3. Make quarterly tax payments
If you expect to owe $1,000 or more in taxes for your side hustle, you should be making quarterly tax payments.
The way our tax system works in the U.S. is that people pay as they go. That’s why taxes are taken out of your paycheck when you work a traditional job and not paid in one lump sum payment. But when you’re a self-employed side hustler, no one is taking taxes out of your paycheck, so you are responsible for paying throughout the year.
Side hustlers who have been at it for at least a year can use last year’s taxes to estimate, but tax software and keeping track of your earnings is the best way to get a more accurate estimate.
The amount you pay in quarterly taxes is generally a quarter of what you expect to owe for the year, and there are quarterly due dates for your taxes:
- April 15 - Quarter 1
- June 15 - Quarter 2
- September 15 - Quarter 3
- January 15 - Quarter 4
If the amount you’ve estimated isn’t enough, that’s considered an underpayment, and you’ll have to pay it at the end of the year. Again, no big deal. Having a better estimate and setting aside more in the future will help you avoid owing at the end of the year.
4. Find deductions for your side hustle taxes
When you work for yourself, you have a higher tax burden, which is why it’s extremely beneficial to find ways to lower your taxable income. A major way to do this will be claiming all of your business expenses.
Remember, you’re keeping track of these now, so this shouldn’t be too hard now.
To deduct expenses, the IRS says they need to be both “ordinary and necessary.” That means I can’t claim my new golf clubs as an expense, but I can claim the income I pay my virtual assistants.
Expenses can be things like marketing and advertising, your home office, mileage on your vehicle, office supplies, employee income, qualified business income, etc.
Here are some examples of side hustles and the kinds of expenses you may be able to deduct:
- A blogger may be able to deduct the cost of a new laptop, online blogging courses, web hosting fees, what they pay a proofreader to edit their posts, and so on.
- An Uber or Lyft driver may be able to deduct special rideshare insurance, a portion of your cell phone bill since you’re using your phone to drive, a new cell phone, paying for a car inspection, service fees, a mileage deduction to compensate for wear and tear on your vehicle, and more.
- Freelance photographers may be able to deduct the cost of a new camera, film processing costs, printing fees, costs associated with their website, marketing fees, travel expenses, etc.
Side hustlers who work from home may also be able to take a home office deduction, but it must be a dedicated workspace to qualify. You can claim up to 300 sq. ft. in your home, and the size of your office determines the amount of the deduction.
Say your home office is 10% of your home’s overall square footage, figure out how much you spent on your home (mortgage or rent, utilities, wifi, etc.), then claim 10% of that total as a business expense.
Does contributing to a retirement account qualify as a deduction on my side hustle taxes?
Another way to reduce your overall taxable income is to start putting money aside for retirement, and there are special retirement accounts available to those who are self employed and side hustling, like the SEP IRA and Solo 401k.
These accounts might be good for a side hustle because they allow you to set money aside for retirement, something you might be missing from a traditional employer, while getting a business tax break for doing so.
They’re both a little different, but basically you can set aside ~25% of your side hustle income in these accounts. It’s all pre-tax income, but you will pay taxes on it when you withdraw from those accounts.
The Solo 401k is going to offer a little more flexibility for those whose side hustle as your self-employment income grows over time, and it also offers more saving options.
The final word on taxes for your side hustle
No matter how you feel about taxes, it’s important to report your income and pay your taxes. Setting money aside and paying your estimated quarterly taxes is the best way to make sure you won’t owe at the end of the year.
And, as your side hustle income gets more complicated, there might be a point when you decide to hire a tax professional to help you. It’s another deductible expense that might make your side hustle easier and more efficient.
Ultimately, that’s what you’re looking for with how to handle taxes for your side hustle, ways to make things more efficient. If you follow what I’ve talked about in this article, then you’ll be making steps towards the type of efficiency that makes tax time a little less stressful.
Your future self will thank you, trust me!
If you’ve earned $600 or more from your side hustle, you are required to report that as income and pay taxes on it.
If you’re a self-employed side hustler who’s paid some of their income in cash, you will report cash income on your Schedule C. That’s the same form you’ll use to report the rest of your side hustle income.
Freelancers and many other kinds of independent contractors can use TurboTax Self-Employed. It’s $120 for federal plus $50 for each state. It’s highly rated tax software that includes features like direct importing from Square, direct uploading from UberEats and other companies, Schedule C filing, and more.