When you earn money from a side hustle, freelance work or selling online, there's usually no employer withholding tax for you. That makes it easy to spend the whole amount and face a large bill when you file.
Two kinds of tax can apply
- Income tax on your net profit (income minus allowable business expenses), at your marginal rate.
- Self-employment tax, which covers Social Security and Medicare for people who work for themselves, once net earnings pass a small threshold.
A simple set-aside habit
Many people move a fixed percentage of every side-income payment into a separate savings account the day it arrives. A common starting point is 25% to 30%, adjusted once you know your actual rates. The goal is that the tax money is never in your spending account.
Quarterly estimated payments
If you expect to owe a meaningful amount for the year after withholding, the IRS generally expects you to pay during the year through quarterly estimated payments, using Form 1040-ES. Missing them can lead to an underpayment penalty. Another option, if you also have a job, is to increase the withholding on your paycheck to cover the side income.
Track expenses from day one
- Keep a simple log or spreadsheet of income and expenses each month.
- Save receipts for equipment, software, supplies and a share of phone or internet use where it applies.
- Use a separate bank account for side income so records are clean.
Forms you may see
Clients and payment platforms may send Forms 1099-NEC or 1099-K. Income is generally reportable even if you don't receive a form. Self-employed income and expenses are usually reported on Schedule C.
When to get help
If your side income is growing, you have inventory, or you're not sure what's deductible, a session with a qualified tax professional can be worth the cost.
Educational information only, not tax advice. Tax rules, brackets and contribution limits change every year, so confirm current figures at IRS.gov or with a qualified tax professional.