One item that Dave Ramsey consistently hits on is the importance of a side hustle to increase income and better reach your financial goals. Side hustles come in all shapes and sizes: food delivery, lemonade stands, woodworking, buying and selling trading cards, and/or starting a lawn care business. The possibilities are virtually endless. Although some of them can be straightforward from a tax perspective, others can become very complicated. In this article, I will go over several tax items to consider when starting a new side hustle.
Part-Time Jobs
The simplest side hustle from a tax perspective would be taking on another job. Typically, the income from the side hustle is added to your income for the year, and from there, it is business as usual. One important item to consider is the withholdings for this part-time job. If you make under a certain amount at your part-time job, your employers will not withhold any taxes from your income automatically. This could not be an issue if that was your only source of income, but this could create serious issues and potentially lead to penalties when added to the income from your main job.
The only other item to consider is any employer-sponsored retirement plans offered by your side hustle employer. There are several limits placed on the amount you can save in different retirement accounts, and there can be penalties associated with going over those limits. To ensure you don’t exceed any of those limits, it's best to schedule a meeting with one of our advisors.
Hobby vs. Business Income
For other types of side-hustle income, the IRS uses several tests to determine whether it is income from a hobby or a business. The results of this test can have massive implications for the taxability of any income derived from this activity. Several factors are considered, each with equal importance. Some of the factors include:
1. Activity is carried out in a business-like manner
2. Intention of profit
3. Dependency on income from this activity for your livelihood
4. Personal motives (enjoyment, relaxation, etc.) from the activity
5. Having enough income from other sources to fund the activity
6. A more detailed list can be found on the IRS website here.
Regardless of whether the activity is considered a hobby or a business activity, the income must be reported, no matter what. However, the key difference lies in deductions. There are no deductions you can take for a hobby, which means you cannot use any expenses to offset any income you generate. However, with a business activity, you can use expenses you incur to offset any profit generated from the business. This also has the potential to expand into your other sources of income, depending on various factors.
Business activity is by no means a “one size fits all” matter on the tax side of things, so it would be best to consult a tax professional to go over your specific situation. Reach out to Whitaker Myers Wealth Managers for more information or schedule a meeting with your financial advisor.
The Taxability of Side Hustles
October 27, 2025
David Gearhart
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