Side Hustles and Gig Work: What to Know Before Filing Your Taxes

When you’re a regular employee working with a W2, filing your taxes can be relatively simple. Things get a bit more complicated, though, once you enter the world of side hustles and gig work. 

Earning some extra cash almost always leaves you liable for reporting that income to the IRS. Unfortunately, too many folks either don’t realize that or fail to take the necessary steps to avoid a big bill from the IRS come tax season. 

You don’t want to be one of them.

That’s why we’re breaking down everything you need to know before filing your taxes if you’ve taken on a side gig.

Keep reading to learn:

• How to report income from a side hustle

• The deductions you can take to lower your tax liability

• How you’re affected by self-employment tax

• If you should set up a business entity

For off, let’s cover how you avoid trouble when picking up side work.

How to Report Side Hustle and Gig Income

If you earned money that isn’t already being taxed by the IRS, you likely need to report it.

That can come from:

• Full-time freelancing or contractor work

• Driving for rideshare or food delivery apps

• Tutoring on the weekends

• Selling products or services on Etsy

• Renting out an Airbnb

Even if you don’t get a 1099 or got paid via Venmo, Zelle, or PayPal, that income is taxable.

Forms for Reporting Side Hustle Income

When reporting your income from gig work or freelancing, you’ll typically need to fill out these forms:

• 1099-NEC: This is where you report non-employee compensation.

• Schedule C: This is where you report your profits and losses from your “business”.

When reporting this income, you’ll also have the opportunity to claim certain deductions that lower your tax liability.

Deductions for Side Hustles and Freelancing

When running a business, you can deduct the costs of expenses needed to maintain operations. That applies to freelancers and gig workers as well, even if you haven’t formally set up a business entity (more on that later).

Common deductions for side hustles and freelancing can include:

• Supplies and Equipment: Those that are necessary for you to work.

• Mileage or Vehicle Expenses:  If you use your car for business purposes.

• Home Office: If you meet certain conditions to have that space qualify.

• Phone or Internet: A portion of them, if you use them for business.

• Software and Subscriptions: If you require them to run your business effectively.

• Education: Any courses or certifications that contribute to your business efficacy. 

It’s important to remember these need to be qualified business expenses, not personal ones. 

You can’t drive yourself down to the Carolinas for a family vacation and try to deduct those miles and gas costs. However, if you purchase fabric in order to make clothing for your Etsy shop, those count as a genuine business expense.

You’ll also need to keep clear records and receipts for all claimed deductions. This way, you have proof of each business expense in case the IRS asks for it.

Regardless of what deductions you take, you’ll still need to set aside a portion of your income to satisfy self-employment tax liabilities.

Understanding Self-Employment Tax

Self-employment tax is the amount of tax you owe from income that you earn outside a W2. As of 2026, the federal tax rate sits at 15.3% — 12.4% for Social Security and 2.9% for Medicare.

The Catch with Self-Employment Tax

Contrary to popular belief, this applies in addition to income tax, not in place of it. That means you have to factor in your state’s income tax rate on top of this percentage to determine your tax liability. 

If you don’t set aside the correct amount, you could be in for a big surprise—and headache—come tax season.

How Often to Pay Self-Employment Tax

This depends on your income. Typically, if you expect to owe at least $1,000 in tax when you file your annual return, you’re obligated to file and pay self-employment tax on a quarterly basis. You’ll usually only pay 20% of your income each quarter, then settle up when you file for the overall year.

Note: Not paying quarterly when you’re required to will result in fines from the IRS.

The last thing to consider for gig work or freelancing is whether to remain a sole proprietor or establish a formal business entity.

Deciding If You Need an LLC

Most side hustles start as sole proprietorships—you’re the only one in the boat. However, as your business grows, you may want to consider making things a bit more official by forming a Limited Liability Company (LLC).

Forming an LLC makes sense if:

• Your income is growing: You’re getting into full-time income instead of a few extra dollars a month.

• You have liability concerns: Your work could put you at risk of legal repercussions. 

• You’re working with multiple clients: You seem more official and protect yourself from legal issues.

There are certain legal and tax concerns that come with establishing an LLC, so it’s best to consult an accounting expert to determine the best option for your work situation.

Side Hustles Don’t Have to Come with a Side of Stress

Whether it’s your first time filing gigwork income, you’re looking to find more deductions for your growing business, or you’re considering setting up an LLC, working with a knowledgeable tax advocate can help you stay compliant and avoid costly surprises.

Don’t wait until the last minute to figure out your tax plan. Contact our team at AVM DeMars to see how you’re impacted by New York, New Jersey, or Connecticut tax law and start mapping out your tax plan for the year.