Side hustle taxes are one of the most misunderstood areas of small business taxes — especially in January, when people realize their “side thing” actually produced income. If you freelanced, consulted, sold online, or tested a business idea this year, you may have reporting obligations — even if you didn’t make much. Whether you’re in Chapel Hill or Pittsboro, the IRS rules apply the same way.

January is when I start hearing it:

“It was just a side thing.”
“I only made a few thousand.”
“I formed an LLC, but I didn’t really do anything with it.”
“I didn’t think I had to report that.”

If you tested a business idea this year — freelancing, consulting, selling online, coaching, contract work — this article is for you.

Because here’s the truth about side hustle taxes:

If money changed hands, it likely needs to be reported.

Whether you’re a new entrepreneur in Chapel Hill or testing an idea in Pittsboro, the rules around small business taxes in North Carolina are the same.

Let’s walk through what still must be reported — even if you “didn’t make much.”

1. An LLC Does Not Eliminate Taxes

One of the biggest misunderstandings I see as a #ChapelHillCPA and #PittsboroCPA is this:

Forming an LLC does not make income tax-free.

By default, a single-member LLC is taxed as a sole proprietorship. That means:

• Income and expenses are reported on Schedule C
• Net profit flows to your personal return
• You owe income tax and self-employment tax

Unless you elected S-Corporation status, your LLC is simply a legal wrapper — not a tax strategy.

If you’re unsure how your entity is taxed, this is something we regularly clarify through our Tax Planning Services.

2. “I Didn’t Make Much” Is Not a Reporting Exception

There is no “small enough to ignore” rule.

You must report business income if you received:

• 1099-NEC income
• Payment platform deposits (Stripe, PayPal, Venmo business)
• Direct client payments
• Cash for services

Even if:

• You made under $5,000
• You reinvested everything
• You only operated for a few months

The IRS requires income reporting regardless of scale.

3. Start-Up Expenses Are Not the Same as Random Spending

If you started your business in 2025, timing matters.

The IRS distinguishes between:

• Start-up costs (before operations begin)
• Ordinary and necessary business expenses (after launch)

Up to $5,000 in start-up costs may be deductible in the first year (subject to limitations). The rest may require amortization.

This is where bookkeeping becomes critical.

If you don’t know when your business “began,” the tax treatment becomes guesswork — and guesswork is expensive.

This is also why we emphasize foundational structure in our Accounting Services for Business Owners. Clean records support accurate small business taxes.

4. Commingling Funds Creates Tax and Legal Risk

If you formed an LLC but:

• Used your personal bank account
• Swiped the same card for groceries and software
• Transferred money without documentation

You’ve created accounting confusion.

Commingling funds:

• Weakens liability protection
• Makes tax preparation more expensive
• Complicates audits
• Distorts profitability

For anyone building something long-term — even slowly — a separate business account is non-negotiable.

This is one of the early structural lessons I emphasize in Working for Yourself. Structure creates clarity. Clarity supports better tax outcomes.

5. Bookkeeping Determines Your Tax Reality

When small business owners delay bookkeeping, they delay tax awareness.

Proper bookkeeping helps determine:

• Net profit
• Self-employment tax exposure
• Whether quarterly payments are required
• Cash flow pressure points

If your side hustle produced a profit, you may owe:

• Federal income tax
• Self-employment tax (15.3% up to limits)
• North Carolina income tax

This is especially important for those navigating North Carolina small business taxes for the first time.

We often see penalties arise not from noncompliance — but from surprise.

And surprise happens when bookkeeping is ignored.

6. Estimated Tax Payments Are Often Required

If your side hustle generated meaningful profit and you did not increase W-2 withholding, you may need to make quarterly estimated tax payments.

Failure to do so can result in penalties — even if the business was “just testing.”

Estimated payments are one of the most common gaps we address in our Small Business Tax Planning Meetings.

A Final Thought for New Entrepreneurs

Testing entrepreneurship is smart.

Ignoring structure is not.

The tax return simply reflects how seriously the business was treated during the year.

Whether you’re growing something in Chapel Hill or starting quietly in Pittsboro, building proper systems early reduces stress later.

Side hustle taxes aren’t complicated — but they do require intention.

If you’re unsure whether your business income needs reporting, or whether estimated payments apply, let’s clarify it now — not next April.