I hate to be the bearer of bad news, but, yes, you have to pay taxes on it.  It's earned income, isn't it?  Once your net earnings from self-employment pass $400 a year, you have to file Schedule SE with your form 1040.  You may owe self-employment taxes. Self-employment taxes are IN ADDITION to state and federal income taxes.  Self-employment taxes are levied to collect Social Security and Medicare taxes from people who are self-employed folks.

 

If you're an employee, the first $97,500 of your wages (for 2007) are subject to Social Security tax at a rate of 12.4%. All of your wages — no limit — face the Medicare tax at a rate of 2.9%. You pay half of these taxes (through withholdings) any your employer pays half. 

 

Self-employed persons pay BOTH HALVES by writing checks to the government as part of their quarterly estimated tax payments. For 2007, a self-employed person owes self-employment as follows:  15.3% of the first $97,500 of self-employment income. Of that:  12.4% is for Social Security tax and 2.9% is for the Medicare tax.

 

So, yes, you must pay income taxes on your moonlighting AND (if it exceeds a net $400) you must pay self-employment taxes.  Calculating your self-employment taxes isn’t difficulty (just paying them!).  There’s an IRS Schedule SE (Are you surprised? They have a schedule for EVERYTHING) which will lead you through determining how much self-employment taxes you owe.  Here’s how:  Use the bottom line net business income from Schedule C (if you're a sole proprietor), or Schedule E (if your business is treated as a partnership for tax purposes), or Schedule F (if you're a farmer). Multiply that number by 0.9265 and the result is your self-employment income. The first $97,500 of 2007 self-employment income is taxed at 15.3% and anything above that is taxed at 2.9%.