When you need to pay self-employment tax
If you earn $400+ from self-employment (US), you must pay self-employment tax and file Schedule C.
Self-Employment Tax Breakdown (US 2024)
- • Social Security: 12.4% on first $168,600 of net earnings
- • Medicare: 2.9% on all net earnings
- • Additional Medicare: 0.9% on earnings over $200K (single) / $250K (married)
- • Total rate: 15.3% for most side hustlers
- • Deduction: Can deduct half of SE tax as above-the-line deduction
Record-keeping essentials
Separate business banking
Open dedicated business checking/savings accounts, use business credit card
Track all income sources
1099-NEC, cash payments, app-based earnings (Uber, Etsy, etc.)
Document deductible expenses
Keep receipts, categorize expenses, track mileage and home office use
Quarterly tax estimates
Set aside 25-30% of profits for taxes, make estimated payments
Major business deductions
Direct Business Expenses
- • Equipment & supplies: Computer, software, tools
- • Marketing & advertising: Website, business cards
- • Professional services: Legal, accounting, consulting
- • Travel & meals: Business-related, 50% limit on meals
- • Education: Courses, certifications to improve skills
Home Office & Vehicle
- • Home office: $5/sq ft (max $1,500) or actual expenses
- • Vehicle expenses: 67¢/mile (2024) or actual costs
- • Internet & phone: Business portion of bills
- • Insurance: Business liability, equipment coverage
- • Subscriptions: Business-related software, memberships
Quarterly estimated payments
| Quarter | Period Covered | Due Date | Payment Method |
|---|---|---|---|
| Q1 | Jan 1 - Mar 31 | April 15 | IRS Direct Pay, EFTPS |
| Q2 | Apr 1 - May 31 | June 17 | Form 1040ES voucher |
| Q3 | Jun 1 - Aug 31 | September 16 | Online payment portals |
| Q4 | Sep 1 - Dec 31 | January 15 | Can file return instead |
Estimated Payment Safe Harbor
- • Pay 90% of current year tax owed, OR
- • Pay 100% of last year's tax (110% if AGI > $150K)
- • Underpayment penalty applies if you miss these targets
- • Exception: If you owe less than $1,000 at filing
Regional considerations
🇺🇸 United States
State tax obligations
Most states require quarterly estimates if you owe $500+, some have different rates
City/local taxes
Some cities (NYC, Philadelphia) have separate business income taxes
Business licenses
May need local business licenses even for small side hustles
🇨🇦 Canada
Self-employment threshold
Report all self-employment income, no minimum threshold
CPP contributions
Must pay both employee and employer portions (10.9% combined in 2024)
HST/GST registration
Required if earnings exceed $30,000 over 4 quarters
🇬🇧 UK
Class 2 & 4 NICs
Class 2: £3.45/week if profits > £6,725. Class 4: 9% on £12,570-£50,270
Self Assessment
Must register and file if self-employment income > £1,000
Common side hustle scenarios
Freelance/Consulting Work
- • Income: 1099-NEC from clients, track cash/check payments
- • Deductions: Home office, equipment, professional development
- • Quarterly taxes: Essential since no withholding
- • Business structure: Consider LLC for liability protection
Gig Economy (Uber, DoorDash, etc.)
- • Income: 1099-K or 1099-NEC, track all platforms
- • Vehicle expenses: Mileage deduction usually better than actual
- • Phone & data: Business portion of cell phone bills
- • Supplies: Insulated bags, car cleaning, phone mounts
Online Sales (Etsy, eBay, Amazon)
- • Income: 1099-K for payment processor transactions
- • COGS: Cost of materials, inventory, shipping supplies
- • Platform fees: Etsy fees, Amazon FBA costs, eBay final value fees
- • Storage: Home office space used for inventory
Tax planning strategies
Time deductible expenses
Buy equipment in high-income years, bunch expenses to maximize deductions
Contribute to SEP-IRA
Up to 25% of net self-employment income, maximum $69,000 (2024)
Consider business entity
S-Corp election can save on self-employment tax for higher earners
Track everything digitally
Use apps like QuickBooks Self-Employed, MileIQ, or Keeper for automation
⚠️ Common Mistakes
- • Not making quarterly payments: Underpayment penalties can be significant
- • Mixing personal and business: Makes record-keeping and audits much harder
- • Overstating deductions: Home office and vehicle expenses are audit triggers
- • Not tracking mileage: Forgetting to log business miles throughout the year
- • Ignoring state obligations: Focusing only on federal tax requirements
💡 Pro Tip
Set up a separate "tax savings" account and automatically transfer 25-30% of each payment you receive. This ensures you have money set aside for quarterly payments and won't be scrambled come tax time.
Frequently Asked Questions
Do I need to file taxes if I only made $200 from my side hustle?
In the US, you must file Schedule C if you had net earnings of $400+ from self-employment. Even below that threshold, you should report the income as other income on your tax return.
Can I deduct my entire home internet bill?
Only the business portion is deductible. If you use internet 30% for business, you can deduct 30% of the bill. Keep records showing your business usage percentage.
What if my side hustle operates at a loss?
You can generally deduct business losses against other income, but the IRS has "hobby loss" rules. You need to show profit motive and can't have losses more than 3 out of 5 years without scrutiny.
Should I form an LLC for my side hustle?
LLCs provide liability protection but don't change your tax obligations (still file Schedule C). Consider if you have liability concerns, want to appear more professional, or plan to scale significantly.