You drive, deliver, tutor or freelance on the side, and every payout lands in your account whole: no taxes taken out, no pay stub, no explanation. It feels like a raise until April, when the IRS asks for its share of money you already spent.
A paycheck vs. a gig payout
A W-2 employer runs withholding on every paycheck: it sends part of your pay to the IRS before you see it, so the deposit is already net of tax. A gig platform or a client skips that step. The full gross amount hits your account, and the tax is still owed. You pay it later, yourself.
| W-2 paycheck | Gig or 1099 payout | |
|---|---|---|
| Tax withheld each time | Yes, automatically | No — nothing is held back |
| What hits your account | Net pay, after tax | The full gross amount |
| Income tax | Prepaid through withholding | Paid by you through estimated taxes |
| Social Security and Medicare | 7.65% from you, 7.65% from your employer | All 15.3%, as self-employment tax |
| The form you receive | W-2 | 1099-NEC or 1099-K |
The fourth row is the one that catches first-year gig workers. An employer pays half of your Social Security and Medicare tax; when you are the business, you pay both halves. Self-employment tax and quarterly estimates shows that math line by line. The point for now: the money in your account after a payout is not all yours.
The forms that report your income
Two forms report self-employment income, and the payer sends a copy of each to the IRS, so your income is on record whether or not the form reaches you.
| Form | Who sends it | Sent for 2025 payments when | Sent for 2026 payments when |
|---|---|---|---|
| 1099-NEC | A client or company that paid you directly for work | That payer paid you $600 or more in the year | That payer paid you $2,000 or more in the year |
| 1099-K | A payment app or online marketplace that processed your sales | More than $20,000 in payments and more than 200 transactions | Same |
| No form | Cash jobs, and any payer under its threshold | Income is still taxable | Income is still taxable |
The 1099-NEC ("nonemployee compensation") is the direct-pay form: a freelance client, a tutoring family that pays by check, a company that hired you as a contractor. The threshold is $600 for payments made in 2025 and $2,000 for payments made after December 31, 2025, so fewer forms will arrive in early 2027. Not less tax — fewer forms.
The 1099-K comes from payment processors and marketplaces: card processors, app-based platforms, online selling sites. Its threshold is more than $20,000 in payments and more than 200 transactions in the year. The phase-down to $600 that was scheduled for earlier years was repealed, so most side gigs never trigger one. The forms you'll receive covers the rest of the winter paperwork.
"It's all my money": the trap
Because nothing was withheld, every dollar of a payout feels like profit. Part of it belongs to the IRS and is only sitting in your account until April. Spend it all and you have spent next year's tax bill early.
The fix is a set-aside: the day a payout lands, move a fixed share into a separate account you don't spend from. How much depends on the tax bracket your other income puts you in, because gig profit stacks on top of it:
| Your other income (single, 2025) | Marginal rate | Tax on each dollar of gig profit | Set aside from each gross payout |
|---|---|---|---|
| Taxable income up to $48,475 | 12% | 23 cents | 25% |
| Taxable income $48,476–$103,350 | 22% | 30 cents | 32% |
| Taxable income $103,351–$197,300 | 24% | 32 cents | 35% |
The "tax on each dollar" column is the 15.3% self-employment tax on 92.35% of profit plus income tax at your rate after the deductions the next two lessons explain. The set-aside runs a little higher than that, and it comes off the gross payout, so business expenses give you extra room: what's left over comes back to you after filing. Check your bracket at /tools/tax-brackets, and open the tax account the way automation and sinking funds sets up any money with a job.
Where the set-aside goes
The tax account isn't a savings goal; it's a holding tank with four drains. The IRS expects gig workers to pay estimated taxes on April 15, June 15, September 15 and January 15, and each payment is a transfer from the tax account instead of a scramble through checking. If you also have a W-2 job, there's an even simpler route: file a new W-4 and have your employer withhold extra from each paycheck. Both routes, the due dates and the penalty for paying nothing during the year are in self-employment tax and quarterly estimates.