Step 4: Understand the Taxes on Side Income

Taxes are the part of side income many people would rather not think about. The good news is that the basics are not complicated. A little planning now saves a lot of worry in April.

This is general information, not tax advice. Rules can change, and your own situation matters, so check with the IRS or a tax preparer.

All side income counts

The IRS says income from side work must be reported on your tax return, even if it is part-time, paid in cash, and even if you never get a tax form for it. You can read this on the IRS Gig Economy Tax Center.

The tax forms you might receive

• Form 1099-NEC: sent by a business that paid you for work. Starting with payments made in 2026, the reporting threshold rose from $600 to $2,000 under a 2025 federal law, according to a Paylocity tax alert. You still report income below that amount.
• Form 1099-K: sent by payment apps and online marketplaces. The IRS’s 1099-K page says these are required when goods-or-services payments top $20,000 across more than 200 transactions, though you may get one for less.

Money from friends and family for shared meals, gifts or paying you back is generally not taxable, the IRS says. Marking those payments as personal in the app helps keep them off a 1099-K.

Self-employment tax

If you work for yourself, you may owe self-employment tax as well as income tax. It is 15.3% (12.4% for Social Security and 2.9% for Medicare), and it applies when your net earnings from self-employment are $400 or more in a year. You figure your profit on Schedule C and the tax on Schedule SE.

Paying during the year

No one withholds tax from side income. If you expect to owe $1,000 or more when you file, the IRS says you generally need to make estimated tax payments in four installments, using Form 1040-ES. A simple habit helps: each time you are paid, move a share into a separate “tax” envelope or account.

How it can affect Social Security and other benefits

If you are under full retirement age and getting Social Security, there is a yearly earnings limit. For 2026 it is $24,480; above that, $1 is withheld for every $2 you earn. In the year you reach full retirement age, the limit is $65,160 and $1 is withheld for every $3 over it, counting only months before your birthday month. Net profit from self-employment counts.

SSI works differently. According to Social Security, the first $65 of monthly earnings is not counted and half of the rest is, so SSI can go down as you earn more. Medicaid and housing help have their own rules, too.

Keep simple records

A notebook works fine. Write the date, who paid you, how much, and any costs like supplies or fees. Keep receipts in one envelope. Come tax time, you will be glad you did.

Sources

• IRS: Gig Economy Tax Center
• IRS: Understanding your Form 1099-K
• Paylocity: 1099 reporting threshold increased
• IRS: Self-employment tax (Social Security and Medicare taxes)
• IRS: Estimated taxes
• Social Security Administration: Receiving benefits while working
• Social Security Administration: Understanding SSI income