Side Hustle Taxes Are Complicated. 5 Tips I Wish I Knew When I Started Freelancing
If you have a side hustle or own your own business, these tax tips will make your life much easier.
Daniella Flores (they/them) is a former software engineer and founder of the two-time award-winning money, career and side hustle resource platform "I Like to Dabble" for LGBTQ+ and neurodivergent folks. Daniella has been featured in The New York Times, TIME, Investopedia, CNBC, MSN, Business Insider and more. They believe that none of us should have to do just one thing our entire lives, nor accept discrimination or toxic workplace behavior to "make a living." Their mission is to change the way we work by shining a light on the possibilities to make money with our own creative energy and to gain more control in our lives.
I don't know if it was anxiety-fueled dread that kicked in each time I thought about managing my freelancer taxes or the collective fear many of us have of the IRS. Whatever it was, I put off managing my side hustle finances for a long time, a mistake I hope others can learn from.
Following my first job post-college at a web startup, I began freelancing as a web developer, making $100 an hour -- and I loved the freedom and flexibility of the gig. I could work from anywhere on my laptop as long as I fulfilled my 10 hours per month and met project expectations.
Since then I've tried a lot of different side hustles, from working as a brand ambassador to pet sitting, reselling on eBay, blogging, freelance writing, consulting, selling digital products and more. This year, I quit my day job as a software engineer to run my no-cost resource platform on money, careers and side hustles, I Like to Dabble, designed to help LGBTQ+ and neurodivergent folks level up their income and design their ideal lives.
Managing my own business is rewarding -- and it's even easier now that I know how to handle my freelance taxes. Whether you're new to side hustling or simply putting off your taxes like I did, here's what I wish I knew about taxes when I first started out.
Freelancers pay two types of taxes: Self-employment and income taxes
When I first started freelancing as a web developer, I knew nothing about estimated taxes. I also had a limited understanding of how taxes even worked as a sole proprietor.
As a W-2 employee working for a company, your employer generally withholds taxes for you based on how you fill out your W-4 (PDF). Additional income you make on the side of your day job is usually considered self-employment income, and you're responsible for paying self-employment tax in addition to income tax on those earnings.
Self-employment tax includes Social Security and Medicare contributions. When you work a traditional job, your employer usually covers a portion of this cost. When you're self-employed, you're responsible for paying both the employee and employer portions of your Social Security and Medicare tax, 15.3% in total.
In addition to your self-employment tax, you're also responsible for paying income taxes in quarterly estimated tax payments to the IRS. Any individuals, sole proprietors, partners and S-corporation shareholders are required to make estimated tax payments if they expect to owe $1,000 or more when their return is filed, according to the IRS. And depending on the state you live in, you may also need to make estimated payments to your state's department of revenue.
Wrapping my head around estimated taxes was difficult at first, until I got in touch with an accountant. I put off hiring an accountant for so long because I thought it was something only wealthy people did. But I was very wrong. I recommend any new side hustler hire an accountant sooner rather than later.
Since I was working full time for an employer and part time for myself, my accountant explained that I could withhold extra taxes with my employer to help cover my estimated taxes for my side hustle. This route eliminated the manual action of paying them every quarter, a strategy I wouldn't have known about without talking to an accountant.
Estimated taxes weren't the only thing she helped me understand either. My accountant explained how sales tax worked -- essential knowledge for any side hustler selling products -- and pointed out deductions I could take to lower my tax bill. She also helped categorize my income and expenses correctly, and explained monthly bank reconciliations. She basically gave me a crash course in business financial management.
The best part of hiring an accountant? I was able to overcome my fear of the IRS arresting me for making a tiny mistake on my tax return. And that in itself was worth the money. Finally, I was no longer alone in this.
You won't always receive a 1099 for your side hustle work
When I started side hustling, I always received a 1099 form from my clients and contract work, which detailed the amount I earned.
As a contractor, 1099s can make managing your income easier. Come tax time, you can combine your 1099s to figure out how much you made. There are two main types of 1099s freelancers could receive: a 1099-NEC from clients for payments over $600, or a 1099-K from third-party payment processors like PayPal or Venmo.
While the IRS is tightening up on 1099 requirements, it's important to know that even if you don't receive a 1099 for your self-employment income, it's still your responsibility to report these wages. It wasn't until I started my website and diversified my income streams that I realized this.
That's why I love all-in-one accounting tools such as Quickbooks and Bonsai. They make it easy to track your business income and expenses in one place. They also usually make it simple for your accountant to review all of your information when filing your taxes.
Buying software and tools can seem expensive at the beginning of your side hustle, but if they make it easier to manage your finances or tasks, they're probably a worthwhile investment. They may also qualify as a business expense that you can write off to lower your tax bill even more.
Brush up on specific tax requirements in your state
If you offer a service or a product as a way to monetize your side hustle, you might be subject to specific taxes in your state, including sales tax.
When I started selling digital products as a part of my business revenue, sales tax in my state wasn't a concern. I lived and operated my business out of Missouri, which doesn't levy sales tax on digital products.
When I moved to Washington, I was delighted to learn I no longer needed to pay state income tax. However, I was now required to collect sales tax on the digital products I sold, which included the merchandise in my online store and my online courses.
My new accountant was able to help steer me in the right direction to set up the collection and remittance of sales tax.
If you need to consider sales tax as part of your side hustle, I recommend starting with your state's department of revenue website to read up on the requirements. And I'll say it again: Reach out to an accountant to make sure you're handling your taxes the right way.
Side hustle taxes are confusing, but they don't have to be
When your income streams don't fall under the traditional 9-to-5 gig, your taxes become more complicated. But with some preparation, research and an accountant by your side, they'll become much easier to tackle.
You're not alone in this. Don't be afraid to ask for help.