Side Hustle Taxes Explained: Federal Tax Rules Every Gig Worker Should Know
Starting a side hustle—whether freelancing, consulting, selling online, or driving for a gig platform—can be a powerful way to increase income. But with that extra income comes important federal tax responsibilities.
Understanding how the IRS treats side hustle income can help you avoid penalties, maximize deductions, and stay compliant. Below is a comprehensive guide to the key federal tax considerations for side hustles, with direct references to IRS guidance and tax law.
1. Is Your Side Hustle a Business or a Hobby?
One of the first questions the IRS asks is whether your activity is a business or a hobby.
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A business is operated with the intent to make a profit
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A hobby is done mainly for recreation or personal pleasure
This distinction matters because:
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Business expenses may be deducted in excess of income
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Hobby expenses are generally not deductible
The IRS evaluates multiple factors, including:
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Whether you keep complete and accurate records
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The time and effort you devote to the activity
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Whether you depend on the income
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Your history of profits or losses
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Whether you change operations to improve profitability
No single factor is determinative. For more details, see IRS guidance on hobby vs. business income and Internal Revenue Code § 183.
2. Reporting Side Hustle Income
All income from your side hustle must be reported, regardless of how or whether it is reported to you.
This includes income received:
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Via Form 1099-NEC, 1099-K, or 1099-MISC
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In cash, goods, or services
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Through digital platforms or virtual currency
Even if you do not receive a tax form, the income is still taxable.
If you are self-employed, you generally report your income and expenses on Schedule C (Form 1040). See IRS Publication 334, Tax Guide for Small Business for details.
3. Self-Employment Tax
If your net earnings from self-employment are $400 or more, you must:
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File a federal tax return
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Pay self-employment tax, in addition to income tax
Self-employment tax covers:
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Social Security
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Medicare
The tax rate is generally 15.3% of net earnings and is calculated on Schedule SE (Form 1040), under IRC §§ 1401 and 1402.
4. Estimated Quarterly Tax Payments
Unlike wages, side hustle income usually does not have taxes withheld.
You may need to make quarterly estimated tax payments if you expect to owe $1,000 or more for the year.
Estimated tax due dates are generally:
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April 15
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June 15
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September 15
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January 15 (following year)
Learn more at IRS – Manage Taxes for Your Gig Work.
5. Deducting Business Expenses
You may deduct ordinary and necessary expenses incurred in carrying on your trade or business under IRC § 162.
Common deductions include:
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Advertising and marketing
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Supplies and software
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Business use of a vehicle
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Home office expenses
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Professional fees
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Start-up costs
Proper documentation is critical. See IRS Publication 334 for allowable deductions.
6. Recordkeeping Requirements
Good recordkeeping is essential to support your tax return.
You should keep:
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Receipts and invoices
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Bank and credit card statements
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Mileage logs
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Proof of income received
The IRS generally recommends keeping records for at least three years after filing. Guidance is available in IRS Publication 583, Starting a Business and Keeping Records.
7. Choosing a Business Structure
Most side hustles begin as sole proprietorships, but other options include:
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Partnerships
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LLCs
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Corporations
Your choice affects:
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Tax filing requirements
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Liability protection
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Payroll and reporting obligations
You may need an Employer Identification Number (EIN), especially if you have employees or operate as a partnership or corporation. See Publication 583.
8. Issuing Forms 1099 to Contractors
If you pay $600 or more to a contractor or service provider during the year, you may be required to file Form 1099-NEC.
Failure to file required information returns can result in penalties.
9. Home Office Deduction
You may qualify for the home office deduction if:
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A portion of your home is used regularly and exclusively for business, and
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It is your principal place of business or where you meet clients
Eligible expenses may include rent, utilities, and mortgage interest. See Publication 334 and Publication 583.
10. Vehicle Expense Deductions
If you use your vehicle for business, you may deduct:
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The standard mileage rate, or
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Actual expenses based on business use
A mileage log is required to substantiate the deduction.
11. Deducting Start-Up Costs
You may deduct up to $5,000 in start-up costs in your first year, with the remainder amortized over 15 years, subject to limits if total costs exceed $50,000.
12. State and Local Tax Considerations
In addition to federal taxes, you may owe:
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State income tax
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Sales or use tax
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Local business or licensing fees
Requirements vary by location and business type.
13. Self-Employed Health Insurance Deduction
If you are self-employed, you may be able to deduct health insurance premiums for:
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Yourself
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Your spouse
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Your dependents
This deduction is subject to specific eligibility rules under Publication 334.
14. Qualified Business Income (QBI) Deduction
You may be eligible for a deduction of up to 20% of qualified business income under IRC § 199A, subject to income and activity limitations. See IRS guidance on the QBI deduction.
Summary: Key Side Hustle Tax Steps
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Determine whether your activity is a business or hobby
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Report all income, regardless of form
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File Schedule C and Schedule SE if required
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Make estimated tax payments when necessary
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Deduct ordinary and necessary expenses
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Maintain thorough records
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Evaluate your business structure
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Issue required Forms 1099
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Consider home office and vehicle deductions
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Deduct start-up costs properly
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Address state and local tax obligations
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Claim health insurance and QBI deductions if eligible
Authoritative IRS Resources
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