Side Hustle Tax Basics: What Every Gig Worker Should Know

Summer is prime time for side hustles. Whether you’re driving for Uber, delivering food with DoorDash, selling crafts on Etsy, or offering lawn care services around town, that extra income can make a real difference in your budget. But before you dive headfirst into your new venture, there’s one crucial aspect you need to understand: the tax implications.

Too many gig workers focus solely on the earning potential without considering the tax responsibilities that come with being a business owner. The result? Unpleasant surprises at tax time, missed deduction opportunities, and potential penalties for underpayment. The good news? With proper planning and record-keeping from day one, your side hustle can be both profitable and tax-compliant. Let’s break down everything you need to know to keep your gig work financially smart.

The Fundamental Reality: You’re a Business Owner

Here’s the first thing every gig worker needs to understand: when you start a side hustle, you become a business owner. This isn’t just semantics—it fundamentally changes your tax situation and responsibilities.

As a business owner, all income from your side hustle is taxable, regardless of whether you receive a 1099 form or not. This is true whether you earned $50 or $50,000 from your gig work. The IRS doesn’t care if you call it a “side hustle” or consider it “just extra cash”—if you’re providing goods or services for payment, you’re operating a business and must report that income.

When You’ll Receive Tax Forms

1099-NEC (Nonemployee Compensation): You’ll receive this if you earned $600 or more from a single company. This form reports your earnings to both you and the IRS.

1099-K (Payment Card and Third Party Network Transactions): Platform-based gig workers (Uber, DoorDash, Etsy, etc.) may receive this form if they exceed certain transaction thresholds during the year. The specific thresholds for receiving a 1099-K have been subject to recent legislative changes, so check current IRS guidance for the latest requirements. However, getting a 1099-K doesn’t automatically mean you’ll pay more in taxes – it’s primarily a reporting tool.

No form received? You’re still required to report the income. Keep detailed records of all payments, regardless of whether you receive official tax documents.

Understanding Your Tax Classification

Most gig workers are classified as independent contractors, not employees. This classification has significant tax implications:

Self-Employment Tax

As an independent contractor, you’ll pay self-employment tax of 15.3% (Social Security and Medicare taxes) on your net earnings from self-employment. This is in addition to regular income tax. For employees, this tax is split between the employer and employee, but as a contractor, you pay both halves.

Important note: You only pay self-employment tax on your net profit (income minus legitimate business expenses), not your gross income.

Unlike employees who have taxes withheld from each paycheck, you’re responsible for making estimated tax payments throughout the year. You’re generally required to make estimated payments if you expect to owe $1,000 or more in taxes when you file your return AND your withholding and credits will cover less than 90% of your current year tax or 100% of your previous year’s tax.

Payment due dates for 2025:

• April 15, 2025 (for January-March)
• June 16, 2025 (for April-May)
• September 15, 2025 (for June-August)
• January 15, 2026 (for September-December)

Essential Record-Keeping: Your Tax-Time Lifesaver

Good record-keeping isn’t just recommended—it’s essential for minimizing your tax burden and staying compliant. The foundation of smart gig work tax management is tracking every dollar that comes in and goes out. Whether you’re receiving payments through an app, getting cash from customers, or earning through multiple platforms, you need a system to document when money arrives, how much it was, and where it came from.

Start with your income tracking. Download and save those monthly or quarterly statements from gig platforms—they’re gold when tax time arrives. Don’t rely on being able to access old statements online; platforms sometimes change their systems or limit how far back you can view historical data. For cash payments (especially important if you’re doing service work like lawn care or tutoring), create a simple log or use your phone to immediately record the date, amount, and customer. Every deposit into your business bank account should have a clear source you can identify months later.

Expense documentation is where you can really impact your tax bill. Every legitimate business expense that is ordinary and necessary for your gig work reduces your taxable income. The IRS defines “ordinary” as common and accepted in your industry, and “necessary” as helpful and appropriate for your business. Keep receipts for ALL qualifying business expenses, even small ones—they add up and can significantly reduce your tax liability!

This includes obvious expenses like gas and vehicle maintenance, but don’t overlook smaller items that add up over time. Your phone bill, cleaning supplies for your car, snacks you provide to rideshare passengers, or the insulated bags you bought for food delivery all count as business expenses. The key is being able to demonstrate that each expense was directly related to earning your gig income.

Your vehicle expenses deserve special attention since they’re often the largest deduction for gig workers. You’ll need to track either your actual vehicle expenses (gas, maintenance, insurance, etc.) and calculate the business percentage, or track your business mileage for the standard mileage rate. Most gig workers find mileage tracking simpler and more beneficial, but the choice depends on your specific situation.

Home office expenses apply if you use part of your home exclusively for business. This might include online sellers who dedicate space for inventory and shipping, or freelancers who have a dedicated work area. The space must be used exclusively for business—your kitchen table where you also eat dinner doesn’t qualify, but a spare bedroom used only for business activities might.

For delivery drivers and service providers, mileage is often your biggest potential deduction. You have two options for calculating vehicle expenses:

Standard Mileage Rate (2025 rate: 70 cents per mile): Track total business miles driven
Actual Expense Method: Track actual vehicle expenses and determine business percentage

General guidance: Most gig workers find the standard mileage rate more beneficial and easier to track, but the best choice depends on your specific situation.

What typically qualifies: Business mileage generally includes driving between business locations (like from one delivery to the next), but the rules can be complex. For example, delivery drivers can usually deduct mileage from the pickup location to the delivery location, but the drive to your first pickup of the day may not qualify as business miles.

Important: Keep detailed records with date, destination, business purpose, and miles for each trip. Consider using a mileage tracking app or maintaining a written log—good documentation is essential if the IRS has questions.

Understanding how tax rules apply to real situations can help you better manage your own gig work. Let’s walk through some typical scenarios and what expenses might make sense for each type of work.

Meet Jennifer, a rideshare driver who works evenings and weekends driving for Uber. Her biggest deduction opportunity is mileage—every mile from picking up one passenger to dropping them off, then driving to the next pickup counts as business miles. She also deducts her monthly phone bill (since she uses it exclusively for the rideshare app during work hours), car washes to keep her vehicle passenger-ready, and those bottles of water and mints she provides to passengers. Jennifer learned to track personal versus business use of her vehicle carefully, since only business miles qualify for the deduction.

Consider Marcus, who delivers food through DoorDash and Grubhub. His situation is similar to Jennifer’s, but with some key differences. He can deduct mileage from the restaurant to the customer, but not his drive from home to the first restaurant of the day. Marcus invested in insulated delivery bags, a phone mount for easy navigation, and even some basic supplies like pens for customers who need to sign receipts. One thing Marcus discovered: he can track his business miles even when he’s driving between delivery zones looking for the next order.

Then there’s Sarah, who sells handmade jewelry on Etsy. Her deductible expenses look completely different—materials like beads and wire, shipping costs for customer orders, the monthly fees Etsy charges for her shop, and photography equipment for taking product photos. Since Sarah has converted her spare bedroom into a dedicated workspace for creating and storing inventory, she can also deduct home office expenses. The key for Sarah is separating her cost of goods sold (the materials that go directly into each piece of jewelry) from her other business expenses.

Finally, there’s David, who offers freelance writing and tutoring services. His expenses focus on professional development and client service—software subscriptions for writing tools, transportation costs to meet clients, marketing expenses for his website, and continuing education courses that help him stay current in his field. When David travels to a client’s location, that mileage counts as a business expense, but his daily commute to a co-working space where he does administrative work wouldn’t qualify.

Each of these scenarios shows how the same tax principles apply differently depending on your specific type of gig work. The common thread? Track everything that’s ordinary and necessary for your particular business, and understand that what counts as a legitimate expense varies significantly depending on what you do.

Tax Forms You’ll Use

Schedule C (Profit or Loss From Business)

This is where you’ll report your side hustle income and expenses. Keeping good records of your business expenses is crucial—this schedule often receives extra attention during IRS reviews.

Key sections:

• Income: Total income from your gig work
• Expenses: All legitimate business expenses
• Net profit/loss: Income minus expenses (this amount flows to your Form 1040)

Schedule SE (Self-Employment Tax)

If you’re self-employed, you’ll use Schedule SE to calculate your Social Security and Medicare taxes. This calculates the 15.3% self-employment tax on your net earnings.

Silver lining: Half of your self-employment tax is deductible as an adjustment to income on your Form 1040.

Smart Tax Strategies for Gig Workers

The difference between gig workers who struggle at tax time and those who thrive often comes down to a few key strategies implemented from day one.

Separate your business and personal finances immediately. This might seem like overkill when you’re just starting out, but opening a dedicated business bank account and credit card makes everything easier down the road. When tax time arrives, you’ll have clear documentation of business income and expenses without having to sort through personal transactions. Many banks offer free business checking accounts for small businesses, and the time saved during tax preparation more than justifies any monthly fees.

Set aside money for taxes with every payment you receive. Unlike traditional employees who have taxes withheld automatically, you’re responsible for managing this yourself. A good rule of thumb that many tax professionals recommend is setting aside 25-30% of your gig income for taxes—this covers both income tax and self-employment tax. Consider opening a separate savings account specifically for tax money. When that $200 delivery weekend comes in, immediately transfer $50-60 to your tax savings. This prevents the shock of owing thousands at tax time with no money set aside to pay it.

Be strategic about tracking deductible expenses. The goal isn’t just to save receipts—it’s to maximize legitimate deductions while maintaining proper documentation. Many gig workers miss valuable deductions because they don’t think about the business use of everyday items. That phone bill you pay every month? If you use your phone for gig work, a portion is deductible. Internet service for your home office? Also potentially deductible. Professional memberships, safety equipment, even the hand sanitizer you bought for delivery work during the pandemic—these add up to meaningful tax savings.

Consider your business structure as income grows. Most side hustlers start as sole proprietors using Schedule C, which is simple and appropriate for getting started. But as your income increases, other structures might offer advantages. An LLC provides liability protection without changing your tax treatment by default, while an S-Corporation election might reduce self-employment taxes for higher-earning gig workers (though it requires payroll processing and additional complexity).

For a deeper dive into how different business structures affect your tax filing requirements, check out our comprehensive guide on Understanding Tax Forms and Entity Types (Business), which explains exactly which forms you’ll need to file based on your business structure choice.

Important: Business structure decisions involve both tax and legal considerations. Always consult with both a business attorney and a tax professional before making changes to your business structure, as the right choice depends on your specific situation, income level, and business goals.

Plan for growth and changing needs. What works when you’re earning $3,000 a year from weekend deliveries may not be optimal when your side hustle grows to $20,000 annually. As your gig work expands, consider investing in professional bookkeeping software, scheduling quarterly check-ins with a tax professional, obtaining business insurance, and exploring more sophisticated tax planning strategies. The key is scaling your tax management approach as your business income grows.

State Tax Considerations

Don’t forget about state taxes! While not all states have income taxes, most do, and your gig income will be subject to state income tax in addition to federal taxes. Each state has its own tax rules and requirements, though many follow federal guidelines as a starting point.

For Minnesota residents specifically:

• State income tax on your gig profits
• Potential sales tax obligations if selling tangible goods
• Business registration requirements for certain activities

Common Mistakes to Avoid

1. Not Tracking Expenses From Day One

Many gig workers focus only on income tracking and miss valuable deductions. Start tracking expenses immediately, even for small purchases.

2. Mixing Personal and Business Expenses

Using the same bank account or credit card for personal and business expenses creates a bookkeeping nightmare. Keep them separate from the start.

3. Ignoring Quarterly Payments

Waiting until April to pay all your taxes can result in penalties and a large, difficult-to-pay tax bill. Make quarterly payments based on your earnings.

4. Not Understanding Business vs. Personal Miles

Only business-related driving is deductible. The drive from your house to your first pickup isn’t typically deductible, but subsequent trips between pickups and deliveries are.

5. Failing to Save Receipts

Keep receipts for ALL business expenses, even small ones. They add up and can significantly reduce your tax liability! Digital receipts are fine—take photos and store them systematically.

Technology Tools That Can Help

The good news is that managing your gig work taxes doesn’t have to mean drowning in paper receipts or spending hours with spreadsheets. Today’s technology can automate much of the tedious record-keeping that used to make small business taxes such a headache.

For mileage tracking, GPS-based apps have become game-changers for delivery drivers and service providers. These apps run in the background on your phone, automatically detecting when you’re driving and logging your trips. Many can distinguish between personal and business driving patterns, though you’ll still need to review and categorize trips periodically. The investment in a good mileage app often pays for itself with the first few hundred miles of deductions it helps you capture.

Expense tracking apps can turn your smartphone into a mobile accounting department. Take a photo of a receipt and the app can automatically extract the vendor, amount, and date, then categorize the expense for you. Some apps even connect to your business bank account and credit cards, automatically importing transactions and learning your categorization preferences over time. This eliminates the shoebox full of crumpled receipts that somehow appears every tax season.

For more substantial side hustles, accounting software becomes worth the monthly investment. These platforms can track income and expenses, generate profit and loss reports, and even integrate directly with tax preparation software. If you’re earning $10,000 or more annually from gig work, the time savings and improved accuracy often justify the cost. Many offer small business versions specifically designed for freelancers and independent contractors.

The key is finding tools that work with your workflow rather than creating additional work. Start simple—even a basic mileage app and expense tracker can dramatically improve your record-keeping without overwhelming you with features you don’t need. As your gig work grows, you can always upgrade to more sophisticated solutions.

Year-End Planning for Gig Workers

As the year winds down, smart gig workers start thinking strategically about their taxes. The decisions you make in the final months can significantly impact your tax bill, so it’s worth taking some time to review your situation and make any beneficial moves before December 31st.

If you’ve been putting off equipment purchases, now might be the time to pull the trigger. Need a new phone for your delivery work? Considering upgrading your laptop for freelance projects? Want to invest in professional tools for your service business? Thanks to 100% bonus depreciation being restored for property placed in service 2025-2029, you can potentially deduct the full cost immediately rather than spreading it over several years. This can provide substantial tax savings, especially if you’ve had a profitable year.

Take a hard look at your estimated payment situation. Pull up your earnings records and calculate where you’ll likely end up for the year. If your gig work took off beyond your expectations, you might need to make a larger fourth-quarter payment to avoid underpayment penalties. Conversely, if business was slower than anticipated, you might be able to reduce your final payment. The goal is to get as close as possible to your actual tax liability without overpaying and giving the IRS an interest-free loan.

Consider accelerating necessary business expenses. If you know you’ll need to incur certain business costs early next year—maybe professional development courses, marketing materials, or equipment maintenance—moving those expenses into the current year can reduce your current tax burden. Just make sure these are legitimate business expenses you would incur anyway; don’t spend money just to get a deduction.

Looking Ahead: Planning for Next Year

Get your document management system sorted now, while this year’s tax experience is still fresh in your memory. Save your tax returns and all supporting documentation for at least three years from the filing date—this includes bank statements, receipts, mileage logs, and any correspondence with tax authorities. Create a simple filing system that you’ll actually use throughout next year. Whether it’s physical folders, digital scans, or cloud storage, the best system is the one you’ll consistently maintain.

If your side hustle is growing significantly, it’s time to start thinking bigger picture. What worked when you were earning a few thousand dollars might not be optimal as you approach $20,000 or more annually. You might benefit from exploring different business structures—an LLC for liability protection or even an S-Corporation election if your income justifies the additional complexity. Professional bookkeeping services start making financial sense at this level, and business insurance becomes not just smart but essential.

Stay connected to tax law developments that could affect your gig work. The tax landscape for independent contractors continues to evolve, and new opportunities or requirements can emerge. Following reputable tax news sources, maintaining a relationship with a tax professional, or even subscribing to updates from the IRS can help you stay ahead of changes that might impact your business. The tax strategies that work best today might not be optimal next year, so staying informed helps you adapt and thrive.

The Bottom Line: Start Smart, Stay Organized

Your side hustle can be a great way to increase your income, but success requires more than just earning money—you need to manage the tax implications smartly. The key principles are:

1. Track everything from day one: Income, expenses, and mileage
2. Separate business and personal finances: Use dedicated accounts and cards
3. Set aside money for taxes: Don’t spend what you’ll owe the IRS
4. Make quarterly payments: Avoid penalties and year-end sticker shock
5. Maximize legitimate deductions: Every business expense reduces your tax burden

Remember, being proactive about taxes isn’t just about compliance—it’s about maximizing your profitability and setting yourself up for long-term success.

Whether you’re just starting your first side hustle or looking to optimize an existing gig work tax strategy, JCT Tax Solutions can help. We understand the unique challenges gig workers face and can provide guidance tailored to your specific situation.

From setting up proper record-keeping systems to developing tax-efficient business strategies, we’re here to help you keep more of what you earn while staying fully compliant with tax requirements.

Questions about your side hustle taxes? Contact us today to schedule a consultation. Let’s make sure your gig work is as profitable as possible—after taxes.

The information provided in this blog is general in nature and has not been customized for your specific tax situation. Tax laws can be complex, and individual circumstances vary. For personalized advice regarding your gig work and tax planning needs, please schedule a consultation with our professional team.