Your Side Hustle May Be Bigger Than You Think — And the IRS Could Agree
You're crushing it with your side gig — deposits flowing in, bank account looking healthy. But the IRS sees your thriving side hustle very differently. While those earnings feel like pure profit, Uncle Sam is calculating something far less appealing.
According to Chad Cummings, an attorney and certified public accountant (CPA) at Cummings & Cummings Law, “The IRS does not care whether you call yourself a freelancer, creator, consultant or hobbyist. Tax exposure begins with the first dollar, often long before the income feels significant, and the bill can arrive long after the money is gone.”
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That gap between what you're making and what you actually owe? It's messier than most side hustlers realize. And the complications don't stop at just income tax. They multiply in ways you probably haven't thought through yet.
The Two Shocks Facing Side Hustlers
There are two issues that might surprise you when you have a side hustle.
1. Self-Employment Tax
This is usually the first wake-up call. Once your net self-employment earnings hit $400, that tax applies on top of income tax.
"A person who earns $30,000 after work and spends it like salary may discover that no employer withheld anything to cover the federal liability," Cummings said. "They're suddenly stuck with a bill they can't pay."
2. The Documentation Problem
Payment apps like Venmo and Zelle create a digital paper trail whether you intended one or not.
"If personal transfers sit beside business receipts, the taxpayer may have to prove which deposits were not income," Cummings explained.
Mix in weak recordkeeping, and those deductions you thought were valid? Destroyed. As Cummings put it, this is the kind of thing would-be side hustlers need to think through before taking their first client.
Other Complications You're Probably Forgetting
Beyond federal and state income taxes, your side business might trigger state registration requirements, licensing rules, local taxes and insurance headaches.
“Your personal automotive or home liability insurance won't cover you when something goes wrong with your business,” Cummings said.
An LLC helps, but it won't erase these obligations. It can actually create more filing requirements while giving owners false confidence that they're covered.
The less formal your setup, the bigger your audit risk. Tax exposure doesn't wait for your income to feel significant.
What Happens When Growth Kicks In
Things get more challenging as revenue increases, not less. More money can mean estimated-tax penalties, larger audit adjustments and state tax exposure across multiple jurisdictions.
As a rule of thumb, Cummings asks his clients considering a side hustle the following: If it takes twice as long and you only make one-third as much, would you still want to do it?
That question should probably come before you start, not after.
The Bottom Line
If you're running a side hustle that's actually generating income, here's the reality check from Marguerita Cheng, certified financial planner (CFP) and CEO of Blue Ocean Global Wealth: "Congratulations on generating positive cash flow your side hustle. If you find yourself having to pay penalties for underpayment of taxes, your side hustle is becoming profitable."
That sarcasm hits home because it's true. So, before you hit that penalty stage, talk to a tax advisor about estimated quarterly tax payments. Set aside funds specifically for taxes and treat it like a non-negotiable business expense. Consider opening a dedicated retirement savings account too.
Building wealth as a side hustler isn't just about the revenue; it's about keeping enough of it to make the whole thing worthwhile.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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