Many people think that if you make less than $600 from a side hustleyou don’t owe taxes. Unfortunately, this is not the case.
This $600 threshold only determines whether a client or platform sends you a 1099 form – it does not determine whether you owe taxes. The truth is that self-employment (SE) tax — the tax that covers Social Security and Medicare when you work for yourself — kicks in once your net profit hits $400.
In our annual edition Secondary Activities Survey68% of side hustlers reported making less than $500 per month – exactly where this confusion hits hardest.
However, there is no need to panic at tax time. Let’s take a look at what this rule actually means and what you can do to reduce the amount you owe.
What the $400 Rule Really Means
Once your net secondary income for the year reaches $400, you owe self-employment (SE) tax to the government. (Note: This is net income, not gross.) You will pay 15.3% of your income toward this liability: 12.4% will go to Social Security, and the remaining 2.9% will go to Medicare.
For example, if you earn $500 as a Lyft driver and deduct $125 in gas and auto repair costs, you won’t owe SE tax because your net income doesn’t exceed the threshold. But if you make $500 selling art on Etsy and deduct only $75 in painting supplies and listing fees, you’ll still have a tax liability.
Keep in mind that this rule only applies to SE tax, not your regular federal income tax. It’s possible to owe no income tax (thanks to deductions and credits) but still owe SE tax if your net profit exceeds $400.
When filing, you will report your income and expenses on Appendix Cthen calculate any SE tax on SE schedule. The $400 rule determines whether Schedule SE applies.
For 2025, the standard deduction is $15,000 for singles and $30,000 for married couples filing jointly. This higher threshold may eliminate your income tax liability – but the SE tax is separate.
Related: How This Artist Makes Over $5,000 a Month Licensing Her Works
Why the $600 myth trips people up
The $600 myth persists because many people confuse it with the 1099-NEC or 1099-MISC reporting threshold. If you earn $600 or more as a contract worker, companies are required to send you a 1099-NEC showing how much they paid you during the year. This rule has been in effect for a long time, but it is expected to change in 2026.
That said, you won’t always receive one, especially from individuals. For example, if a neighbor pays you $1,000 to walk your dog over the course of a year, you should technically get a 1099-NEC, but you probably won’t.
Even without this form, you are still responsible for reporting your income. The IRS expects you to pay taxes on all self-employment income, whether or not you receive a 1099. That’s why it’s so important to track your own income and expenses instead of relying on clients or apps to submit year-end forms.
Related: 6 tips to avoid an unexpected tax bill from you
When $400 isn’t enough
As a side hustler, you should also know When pay taxes. Self-employed workers have more deadlines to meet than traditional W-2 workers.
If you expect to pay more than $1,000 in federal taxes (including self-employment tax) for the year, the IRS requires you to file estimated quarterly tax payments.
For example, if you earn $10,500 from a side hustle at Upwork, you’ll owe about $1,600 in self-employment tax, which is more than the $1,000 threshold. This means that you will have to send part of this amount to the government four times a year, around January 15, April, June and September. (Exact dates may vary slightly due to weekends and holidays.)
Most people use Form 1040-ES to calculate and pay these estimates or offset what is owed by withholding extra from any W-2 income.
This is important because ignoring quarterly taxes can result in penalties.
💡 What happens if you ignore quarterly taxes?
The IRS doesn’t joke about missed taxes, but the penalties are avoidable.
The IRS can match income through 1099s, bank statements and payment apps like Venmo or Cash App. If you haven’t paid your quarterly, they will add a monthly penalty of 0.5% to your balance, plus interest.
For example, if you owed $500 and ignored it for a year, the penalty alone would add about $30, not including interest.
Given that 27% of gig workers rely on their self-employment income to cover their basic needs, it is important to protect this income instead of wasting it on penalties. Even a $400 liability can add up quickly if ignored – but a little planning can prevent that.
How Spending Can Reduce What You Owe
A simple way to reduce your tax bill is to write off the money you spend on your side hustle.
Self-employment tax applies to your net profitnot the total amount you collect. If you track these costs – supplies, fees, mileage, whatever it takes to get things done – each deduction reduces what the IRS can impose. In some cases, this can even push your income below $400, meaning you won’t owe any self-employment tax at all.
For example, let’s say you make $450 a year as a pet groomer. If you deduct $100 of supplies, your net amount falls below the threshold, so you won’t owe SE tax.
Here’s the thing: ignore tracking and you’ll have to approx. $68.85 in self-employment tax, you didn’t need to pay.
You can track costs with a simple spreadsheet, but many scammers prefer basic accounting tools. Keeper, QuickBooks, FreshBooks, and Wave make it easy to send invoices, categorize expenses, and make tax season simple. To learn more about recent changes, see what 2025 tax deductions apply to side hustlers.
Related: How to Track Expenses in 3 Simple Steps
The $400 rule made simple
Basically, the $400 rule is not complicated. Once your net profit for the year reaches this figure, you must pay self-employment tax, even if you don’t owe regular income tax. Earn more and quarterly payments could come into play too.
Here’s a quick way to think about it:
Knowing the rule is one thing. Following him in real life is another. A few simple habits can make a difference:
- Keep track of what you earn and spend. Track your income and expenses as you go so you don’t have to worry later.
- If you cross the $400 mark, plan for taxes. Set aside about 15% of your profits to cover self-employment tax.
- If you owe more than $1,000, pay quarterly. Sending payments throughout the year helps you avoid penalties and keeps tax season from surprising you.
It may seem confusing at first, but once you start tracking your income, it gets easier. A little organization now saves you a lot of stress later and helps you stay on top of your finances with confidence.
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