Tax Basics for Side Income (2025) — Keep More of What You Earn

Why this matters (and why it’s simpler than it seems)

Earning outside a W‑2 is exciting—until tax season. The good news: a few simple habits prevent surprises and help you keep more of what you earn. You don’t need a CPA for every step, but understanding the basics saves money and stress.

This guide covers what to track, whether you need quarterly estimates, what deductions matter most, and when to bring in a pro.

What to track (the 4 essentials)

1. Income — every payment you receive (PayPal, Stripe, checks, cash). Keep a single list with date, payer, amount, and what it was for.
2. Expenses — costs that are ordinary and necessary for your business (software, gear, domain, ads, mileage, contractor help).
3. Invoices & receipts — a folder per year. Save PDFs/screenshots. Name files with date + vendor + amount.
4. Miles — a simple app or spreadsheet. Note trips for client work, gigs, or supply runs.

A spreadsheet is fine. If you prefer software, Wave/QuickBooks/SimplePractice/Notion all work.

Do you owe quarterly estimates?

If you expect to owe $1,000+ in taxes for the year (after withholding and credits), you likely need to make quarterly estimated payments to the IRS (and state where applicable). Deadlines are typically April, June, September, January.

Tip: set aside 25–30% of net profit (income minus expenses) in a separate “tax” savings account as you go. Transfer weekly or monthly.

Self‑employment tax (and why it matters)

Side income is subject to both income tax and self‑employment (SE) tax (Social Security + Medicare). SE tax is roughly 15.3% on net profit (with some adjustments), on top of income tax. Don’t panic—deductions reduce net profit.

Deductions that most beginners miss

• Home office (regular, exclusive use). Simplified method is easy: $5/sq ft up to 300 sq ft
• Phone & internet (business portion)
• Software & subscriptions (editing tools, invoicing, domain)
• Equipment (camera, mic, laptop; consider Section 179 for eligible purchases)
• Education (courses directly related to your business)
• Contractors (pay helpers; issue 1099‑NEC if needed)
• Mileage (standard rate per mile; keep a log)

Keep it honest and reasonable; document everything you’d defend calmly.

When to get a pro

• You cross ~$20k–$30k/year in side profit and complexity rises
• You sell physical goods across states (sales tax considerations)
• You form an LLC/ S‑Corp or start hiring contractors regularly

A good tax pro more than pays for themselves when your time becomes valuable.

Sales tax (quick note)

If you sell physical goods online, you may need to collect/remit sales tax depending on nexus (where you have presence/volume). Marketplaces often handle this for you, but know the rules in your state.

A simple 12‑month rhythm

• Monthly: update income/expenses, move 25–30% to tax savings
• Quarterly: pay estimates if required, review profit trend, adjust set‑aside
• Annually: close your books, issue 1099s if needed, file return, breathe

FAQs

Do I need an LLC?
Not to start. An LLC can help with liability and admin separation later. Focus first on earning and tracking.

What if I can’t pay estimates?
Pay what you can. Staying current reduces penalties. Adjust set‑asides for next quarter.

Can I deduct meals?
If directly related to business (client meeting, travel). Keep date, amount, and purpose.

Your next three steps

• Open a separate checking + savings (tax) account for the side business.
• Create a simple income/expense spreadsheet or choose software.
• Set a weekly 20‑minute “money check‑in” on your calendar and stick to it.

A calm, simple system beats a complicated one you’ll abandon. Keep receipts, move money to tax savings, and build profit steadily.