She made $23,000 selling handmade jewelry on Etsy. Not bad for a "hobby that got out of hand."
Then April came. And so did the panic call.
"I owe $8,200? That's more than I have in my checking account. How is that even possible?"
I'd heard this exact call probably fifty times in my career. Different crafts, same math. She'd priced her products based on material costs plus a margin. She never factored in the 15.3% self-employment tax. She never paid quarterly. She never set money aside.
Now she was staring at a bill that would wipe out most of her profit from the entire year.
Look, here's the thing about side hustles: The IRS doesn't care that you call it a "hobby." If you made money, you owe taxes. And if you're not paying attention, the surprises get expensive fast.
The $600 Reporting Change That Killed the "Cash Economy"
Before we get into mistakes, you need to understand what changed.
Until 2023, Venmo, PayPal, Etsy, and every other payment platform only had to report your income to the IRS if you made over $20,000 AND had 200+ transactions. Most side hustlers flew under the radar.
That's dead now.
The new threshold is $600. One Etsy sale that clears $600 triggers a 1099-K sent directly to the IRS. Uber driver who made $800 in a month? Reported. Freelancer who did one project for $750? Reported.
The gig economy got a lot more visible.
And if you're still operating like it's 2019, you're going to have a very bad April.
The Two Mistakes That Create 80% of the Pain
I could list seven mistakes, ten mistakes, whatever makes for good clickbait. But honestly? Most people get destroyed by the same two things:
#1: Not Understanding Self-Employment Tax
When you have a regular job, you pay 7.65% of your income toward Social Security and Medicare. Your employer matches that, paying another 7.65%. You never see it because it's handled before your paycheck hits.
When you're self-employed, you pay both halves. That's 15.3%, and it hits you on top of your income tax.
The math that breaks people:
Let's say you made $30,000 from your side hustle. Here's what you actually owe:
- Self-employment tax (15.3%): $4,590
- Federal income tax (let's say 22% bracket): $6,600
- State tax (varies): Let's say $1,500
- Total: $12,690
That's 42% of your side hustle income. Gone.
Most people budget maybe 20%. They're $6,000+ short when April arrives.
#2: Not Paying Quarterly
The IRS isn't content to wait until April. If you're going to owe more than $1,000 when you file, they want you paying throughout the year. Miss those quarterly payments? You'll owe underpayment penalties—currently running about 8% annual interest.
The due dates (burn these into your brain):
- Q1: April 15
- Q2: June 15
- Q3: September 15
- Q4: January 15 of the next year
Miss them all, and you're paying interest on money you already owe. It compounds.
The Case Study: How a $50k Side Hustle Almost Bankrupted Someone
A software developer came to us—let's call him Marcus. Day job at a Fortune 500, good salary, no financial stress. On the side, he'd been doing freelance iOS development. Started small, word of mouth, suddenly he's making $50,000/year on evenings and weekends.
He treated it like bonus money. Spent most of it. Didn't track expenses. Didn't pay quarterly.
The damage when we ran the numbers:
- Self-employment tax owed: $7,650
- Federal income tax (pushed him into a higher bracket): $14,500
- State tax: $2,400
- Underpayment penalties: $892
- Total owed: $25,442
He had about $8,000 in savings. He ended up on an IRS payment plan, paying interest for two years.
What he should have done:
- Set aside 30% of every freelance payment immediately
- Paid quarterly estimated taxes
- Tracked his expenses (home office, software subscriptions, portion of his internet bill)
- Consulted with a CPA before year-end to plan strategically
Total cost of doing it right: maybe $800 for a CPA and some discipline. Instead, he paid $25k+ plus interest.
The Deductions Most People Miss
Now for the good news: You can reduce that tax bill significantly if you actually track your expenses.
The deductions I see missed constantly:
Home Office: If you have a dedicated space (doesn't need to be a separate room, but it does need to be "regularly and exclusively" used for business), you can deduct that percentage of your rent/mortgage, utilities, and internet. 150 square feet in a 1,500 sq ft apartment = 10% of those costs.
Mileage: 67 cents per mile in 2026 for business driving. Drive to meet a client? That's deductible. Drive to the post office to ship orders? Deductible. But you need a log. Apps like MileIQ or Everlance make this automatic.
Health Insurance: If you're self-employed and pay for your own health insurance, the premiums are deductible—and this is an "above the line" deduction, meaning you get it even if you don't itemize.
Retirement Contributions: SEP IRA lets you contribute up to 25% of your net self-employment income. This reduces your taxable income directly.
(Side note: I'm amazed how many people making $50k+ self-employed aren't using a SEP IRA. It's free money—or rather, free tax reduction. Takes 20 minutes to set up at Fidelity or Schwab.)
The LLC Question
"Should I form an LLC?"
I get asked this constantly. Here's my honest answer:
If you're making under $40k/year from the side hustle: Probably not worth it. The administrative overhead (annual fees, separate tax filings in some states, registered agent costs) outweighs the benefits for most people.
If you're making $40k-$60k/year: Consider it. The liability protection becomes meaningful, and you look more professional to clients.
If you're making $60k+ and this isn't just a hobby anymore: Yes—and talk to a CPA about electing S-Corp status.
The S-Corp trick (simplified):
As a sole proprietor, all your profit is subject to self-employment tax (15.3%). As an S-Corp, you pay yourself a "reasonable salary" (subject to SE tax via payroll taxes), but any profit above that salary is taken as distributions—no SE tax.
Example on $100k net profit:
- Sole proprietor SE tax: ~$14,130
- S-Corp with $60k salary: ~$9,180 (payroll taxes on salary only)
- Savings: ~$4,950/year
But S-Corp means running payroll, filing quarterly payroll taxes, and more complexity. Usually only makes sense above $60k-$80k annual profit.
The "Recipe for Survival" Version
If you take nothing else from this article:
Set aside 30% of every payment immediately. Put it in a separate savings account and don't touch it.
Pay quarterly. Use IRS Direct Pay. Set calendar reminders. Just do it.
Open a separate bank account for your side hustle. Makes everything easier—tracking, deductions, audit defense.
Track your miles and expenses. Use an app. It takes 30 seconds per transaction.
Above $20k/year, hire a CPA. Not TurboTax. An actual human who does this for a living. It costs $300-$800 and saves you multiples of that.
FAQ
Do I have to pay taxes on income under $600?
Yes. The $600 threshold only determines whether the platform files a 1099. You still owe taxes on every dollar of profit, even if no paperwork is filed. The IRS expects you to report it yourself.
Can I deduct my phone if I use it for personal stuff too?
Partially. If you estimate 40% of your phone use is business-related, you can deduct 40% of the bill and 40% of the device cost. Be reasonable—claiming 100% when you also watch Netflix on it is asking for trouble.
What if my side hustle lost money?
You can deduct business losses against other income (like W-2 wages). But if you claim losses 3+ years out of 5, the IRS may reclassify your "business" as a hobby—and then you lose all the deductions.
Related Reading:
- How to Make $200k a Year
- Contract vs Full-Time: Which Pays More?
- Remote Work Taxes: The State Nexus Trap
