Earn $12,000 on the side with $2,000 of costs, and the profit is $10,000. What reaches your account is $6,951, because $3,049 of it is tax. That is an effective rate of 30.5%, or about 70 cents on the dollar.
The part that catches people is that $1,413 of it is not income tax at all. It is self-employment tax, and it exists because an employer normally pays half your Social Security and Medicare without you seeing it. Work for yourself and you are both halves, so you owe all 15.3%.
It starts at $400 of profit, not at some threshold you would notice, and it is charged before any bracket applies. Somebody in the 12% bracket pays more self-employment tax than income tax on the same money.
The tax that only exists when you work for yourself
Look at a payslip and you will find Social Security and Medicare taking 7.65% of your pay. What the payslip does not show is that your employer pays another 7.65% on your behalf, quietly, on top of your salary. The full cost of those two programmes is 15.3% of what you earn, and as an employee you only ever see half of it.
When you earn money on your own account, there is no employer to pay the other half. You are both parties to the arrangement, so you owe the entire 15.3%. That is self-employment tax, and it is charged before income tax rather than instead of it.
This is why the first tax bill after a good freelance year is so often worse than expected. People take their side income, apply their tax bracket to it, and arrive at a number that is missing the larger part of the problem.
Three details make it worse than it first looks.
It starts at $400. Not $10,000, not some sensible threshold. Four hundred dollars of profit and you are filing a Schedule SE.
It is not a band. Cross $400 and the whole amount becomes liable, not just the part above it.
Nobody withholds it. A client pays you the full invoice. The tax on it is still owed, and by the time you notice, you have usually spent it.
Work out what you will actually keep
Put in what the work brought in, what it cost you to do, and the bracket this income lands in. If you also have a salary, put it in, because it changes the answer more than anything else on this page.
Everything it brought in.
Only what the work required.
Wages already taxed for Social Security.
$6,951
$10,000 of profit, less $3,049 of tax. That is 70 cents on the dollar, an effective rate of 30.5%.
| Self-employment tax | $1,413 |
| Social Security | $1,145 |
| Medicare | $268 |
| Income tax | $1,636 |
Deductions applied: $706 for half the self-employment tax, and $1,859 of business income.
2026 figures. Federal only, so state tax comes off on top of this. The bracket is the rate this income lands in rather than your average rate, because side income sits on top of everything else you earn. This is a guide, not tax advice.
Where $12,000 of freelance income ends up
Following $12,000 of freelance income all the way through, at a 22% marginal rate and with no salary using up the Social Security base.
| Amount | Where it comes from | |
|---|---|---|
| Billed to clients | $12,000 | What the work brought in |
| Less business expenses | −$2,000 | Only what the work required |
| Net profit | $10,000 | The figure everything else works from |
| Self-employment tax | −$1,413 | 15.3% of $9,235, which is 92.35% of profit |
| Income tax | −$1,636 | 22% of $7,435, after both deductions |
| What you keep | $6,951 | 70 cents on the dollar |
Two deductions soften the income tax and neither is automatic in most people’s thinking. Half the self-employment tax, $706, comes off before income tax is worked out. So does the qualified business income deduction, worth $1,859 here, which most ordinary sole traders below the income limits can claim. Together they cut the amount income tax is charged on from $10,000 to $7,435.
Why a big salary makes side income cheaper to earn
Almost no calculator online asks about this, and on a good salary it is worth more than every deduction you will ever chase.
Social Security tax stops at a wage base. For 2026 it is $184,500. Once your earnings for the year pass it, the 12.4% Social Security portion stops entirely and only the 2.9% Medicare portion continues, because Medicare has no ceiling.
Wages from a job count towards that base. So if your salary has already used it up, side income arrives with a self-employment tax rate of 2.9% rather than 15.3%.
| Salary from a day job | Self-employment tax | You keep |
|---|---|---|
| None | $1,413 | $6,951 |
| $180,000 | $826 | $7,487 |
| $184,500 or more | $268 | $7,996 |
Identical work, identical invoices, $1,044 difference. It is not a loophole and there is nothing to claim. It is simply that you have already paid the year’s Social Security in full, and the system does not charge it twice.
The practical consequence is that side income is worth noticeably more to a high earner than the same income is to somebody without a salary, which is the opposite of what most people assume about tax.
What you can actually deduct
Expenses are where most people either leave money behind or get themselves into trouble, and the rule is simpler than the folklore around it.
An expense has to be ordinary and necessary for the work. Ordinary means normal in your line of business. Necessary means helpful and appropriate. That is a lower bar than people assume, and a much higher one than a receipt you happen to have kept.
The things freelancers most often miss:
The home office. A specific space used regularly and exclusively for the work. The simplified method gives you $5 per square foot up to 300 square feet, so up to $1,500, with no records beyond the measurement. Exclusively is the word that fails most claims. A corner of the kitchen table is not it.
Mileage. Driving for the work is deductible at the standard rate per mile, but commuting to a regular workplace is not. The distinction is business travel against getting yourself to work.
The portion of a phone or internet bill used for the work. Not the whole bill unless the line genuinely is business only.
Software, subscriptions, professional fees, insurance that the work requires. Also the fees the platform took before paying you, which people forget because they never saw that money.
Half of business meals where there is a genuine business purpose. Not lunch on your own because you were working.
Expenses reduce both taxes, which is what makes them worth more than they look. A dollar of legitimate expense saves you your income tax rate plus 15.3%, so for somebody in the 22% bracket it is worth around 35 cents rather than 22.
1099 forms and the new $2,000 threshold
From 2026 the threshold at which a business must send you a 1099-NEC rose from $600 to $2,000. Payment platforms have their own reporting rules and their own thresholds.
That change is worth understanding precisely, because it is easy to misread as good news. The reporting threshold is not an income threshold. It governs when somebody else has to tell the IRS what they paid you. It has no effect whatsoever on whether you owe tax.
You owe tax on your income whether or not a form arrives. A client who pays you $1,800 now sends nothing, and the tax position is exactly what it would have been at $2,100. The only thing that changed is how much of your income has been independently reported, which makes your own records the primary source rather than a cross-check.
Which is a good reason to keep them properly. Not a spreadsheet you rebuild each April, but a separate bank account for the work and a running note of what came in and what went out.
Set the money aside as it arrives
The single practical habit that prevents the April problem is separating the tax from the payment on the day it lands, rather than at the end of the year when it has become part of your standard of living.
A reasonable working rule for most people is 30% of profit, which is close to the effective rate the calculator produces for a middle bracket with no salary using up the wage base. Set it aside in a separate account and do not treat it as yours, because it is not.
If you have a large salary, the rate is lower and you can hold back less. If you are in a high bracket or a state with meaningful income tax, hold back more. The point is that the number is decided once, and then applied to every payment automatically.
There is a second consequence. Once side income is more than trivial, the tax on it is generally due through the year rather than in one payment, which is a separate mechanism with its own deadlines and its own penalty for getting it wrong.
Where this fits with everything else
If you are still deciding what the side income should be, our guide to 25 ways to earn money from home and online covers the options. Read it alongside this page rather than after it, because the effective rate is what separates methods that are worth your time from the ones that only look it.
The timing question, meaning when this tax is actually due and what happens if you pay it all in April, is covered in quarterly estimated taxes.
And once the side income is established, it opens a retirement account that employees cannot use, which can shelter far more than an IRA. That is in Solo 401(k) or SEP IRA for side income.
For the broader question of what your working time is actually worth once everything is counted, your real hourly wage applies the same thinking to a salaried job.
How this is calculated
- Self-employment tax is 15.3%, being 12.4% Social Security and 2.9% Medicare, charged on 92.35% of net profit rather than all of it.
- Social Security stops at $184,500 of combined earnings for 2026. Medicare has no ceiling, and an extra 0.9% applies above $200,000 for a single filer, which this does not model.
- The threshold is $400 of net earnings, not of income billed, and crossing it makes the whole amount liable rather than just the excess.
- Half the self-employment tax is deductible against income tax, and the calculator applies it before working out what you owe.
- The business income deduction is taken at a flat 20% of profit after the self-employment tax deduction. The real rules involve income thresholds and business types, and specified service businesses at higher incomes are limited or excluded.
- Federal tax only. State income tax comes off on top, and a few cities add their own. Nothing here models those.
- The bracket is marginal, not average. Side income stacks on top of your other income, so it is taxed at the highest rate you reach, which is the rate to enter.
The rates, thresholds and the wage base come from the IRS page on self-employment tax. Deductible business expenses are set out in IRS Publication 535.
Frequently asked questions
How much tax do I pay on side hustle income?
Self-employment tax of 15.3% on 92.35% of your profit, plus income tax at your marginal rate on what is left after two deductions. For a typical middle bracket with no salary involved, the combined effective rate lands around 30% of profit.
Do I owe tax if I did not get a 1099?
Yes. The 1099 threshold rose to $2,000 for 2026, and it only governs when a business must report what it paid you. Your obligation to report income does not depend on receiving a form.
Do I pay self-employment tax if I already have a job?
Yes, but possibly at a much lower rate. Social Security stops once your total earnings pass the wage base of $184,500 for 2026, and salary counts towards that. If your salary has already used it up, side income owes only the 2.9% Medicare portion instead of the full 15.3%.
What if I only made a few hundred dollars?
Self-employment tax starts at $400 of net earnings. Below that you owe none of it, though the income is still reportable for income tax purposes.
Can I deduct my home office?
If a specific area is used regularly and exclusively for the work, yes. The simplified method is $5 per square foot up to 300 square feet. Exclusively is strict: a space that doubles as anything else does not qualify.
Is it better to be paid as a contractor or an employee?
For the same headline number, employment is worth more, because the employer pays half your Social Security and Medicare and may add benefits. A contract rate needs to be meaningfully higher than a salary to leave you in the same position, and 15.3% is the floor of that gap before you count paid leave or health cover.
Do I need an LLC to deduct expenses?
No. A sole proprietor deducts business expenses on Schedule C with no company of any kind. An LLC is about liability rather than deductions, and forming one changes nothing about what you can claim.