Lesson 10
Taxes on Side Hustles and Self Employment
Time: ~15 to 18 minutes
Side income is taxed differently than job income
Regular Job
When you work a regular job, your employer automatically withholds taxes from each paycheck.
Side Hustle
But when you earn money independently, no one is withholding taxes for you.
That means:
You are fully responsible for paying taxes later.
This surprises a lot of young people because the income feels like full profit at first.
What counts as self employment income
Any money earned outside a traditional employer can be considered taxable side income.
Examples:
Babysitting
Tutoring
Freelancing
Selling products
Reselling clothes or items
Online businesses
Social media income
Contract work
Even if it feels casual, it still counts as income.
Why side income causes tax problems
Since taxes are not automatically taken out:
You might spend all the money
Nothing set aside for tax bills
You forget taxes are owed
Out of sight, out of mind
You owe a lump sum later
Surprise bill at tax time
Penalties can happen if unpaid
Extra fees and interest charges
The IRS expects taxes on all income, even if you never received a form.
The extra tax self employed workers pay
With a Regular Job
Your employer pays half of Social Security and Medicare taxes for you.
You pay: 7.65%
Employer pays: 7.65%
When Self Employed
When you are self employed, you must pay both halves yourself.
You pay: 15.3%
This is called self employment tax.
So side income is taxed more heavily than regular paycheck income.
Estimated taxes
If you consistently earn side income, the IRS may require quarterly tax payments instead of waiting until April.
Q1
April 15
Q2
June 15
Q3
September 15
Q4
January 15
This prevents large unpaid balances from building.
Most beginners do not know this, which leads to unexpected tax bills.
Smart habit for side hustles
Set aside part of every payment you receive.
A common safe rule:
20 to 30%
of side income saved for taxes
This prevents stress when filing later.
Example calculation:
Side hustle payment received
$500
Set aside 25%
$125
You can spend
$375
Reporting side income
Side income is reported when filing taxes even if:
You never received a 1099
It was paid in cash
It was informal
All earnings must be included.
The IRS tracks digital payments especially closely.
Why this matters for young earners
Side hustles feel exciting and profitable, but ignoring taxes can lead to:
Owing money
Penalties
Legal trouble
Financial stress
Understanding this early protects your future.
Key vocabulary
Self employment: Independent income
1099: Income reporting form
Self employment tax: Paying both halves of payroll tax
Estimated taxes: Quarterly payments
Tax liability: Amount owed
Quick recap
- Side income is taxable
- No taxes are withheld automatically
- You pay extra self employment tax
- IRS may require quarterly payments
- Save money from each payment
- Report all earnings
Quick Check
1. Why is side hustle income risky for taxes?
2. What is self employment tax?
3. What is a smart habit for side income?
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Tracking Income Throughout the Year →