Taxes on Side Income
Nothing is withheld from side income, which is why the first year is often a shock.
At a glance
Figures checked 1 Sep 2026
Time needed
An hour to set up, quarterly thereafter
Effort
Moderate
Have to hand
A separate bank account and expense records
What you get
No April surprise, and legitimate deductions captured
What to take away
- Self-employment tax is 15.3% on net earnings up to the Social Security wage base of $184,500 for 2026, plus Medicare above it.
- Set aside 25–30% of net side income for tax from the start.
- Quarterly estimated payments are generally required once the liability crosses the threshold.
Side income arrives without withholding, and it carries both income tax and self-employment tax — the latter covering both halves of Social Security and Medicare, since there is no employer to pay one of them.
The mechanics
- Track income and expenses separately from personal spending. A dedicated bank account is the simplest way.
- Deduct legitimate business expenses: equipment, software, mileage, a qualifying home office.
- Pay estimated tax quarterly to avoid underpayment penalties.
- Half of self-employment tax is deductible as an above-the-line adjustment.
- Expect a Form 1099-NEC or 1099-K depending on the platform and payment type.
A solo 401(k) or SEP IRA lets you shelter a substantial share of side income, which can meaningfully reduce the tax on a profitable year.
Common questions
Not for tax purposes at a small scale — a single-member LLC is taxed the same as a sole proprietorship by default. The reason to form one is liability protection.