If you recently launched a side gig or are working as a freelancer, filing self-employment taxes can feel like a daunting task. On top of running your business, finding clients and completing projects, you also have to track it all.
“The first year of gig work is chaotic,” said Joel Salas, owner of Elevated Tax Strategies and tax expert at JustAnswer.com. Tracking revenue, expenses and mileage can be easily overlooked, he said.
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Independent contractors work for themselves. Their clients typically send them a 1099 form to show their income for the year, which must be reported to the IRS. Tax rules for 1099 contractors differ from those for W-2 employees, who have taxes withheld from their paychecks, which can simplify tax filing.
With preparation and a solid system to track income and expenses -- and possible support from a trusted tax advisor -- you’ll have the tools to get it right.
Employee versus business owner
Being self-employed is often misunderstood to be a filing status, but it’s actually an income type that changes the taxes you have to pay. An independent contractor receives a Form 1099-NEC (non-employee compensation) or 1099-K reflecting their income from that client, organization or platform.
A traditional employee receives a Form W-2, which shows their income, any taxable benefits, and taxes withheld by the employer.
For taxpayers who show 1099 income as a self-employed worker, they must pay a 15.3% self-employment tax to cover both the employer and employee portions of Social Security and Medicare taxes.
W-2 employees pay 7.65% (6.2% to Social Security and 1.45% to Medicare) out of their paycheck in the form of withholding taxes, while the employer covers the other half.
W-2 Employee vs. 1099 Contractor: Key Tax Differences
Action | W-2 Employee | 1099 Contractor |
Filing income | Yes | Yes |
Paying quarterly estimated taxes | No | Yes |
Paying self-employment tax | No | Yes |
Employer withholds taxes | Yes | No |
Claims business deductions | No | Yes |
Mastering income and document tracking
Intuit QuickBooks Solopreneur (formerly QuickBooks Self-Employed ): This online bookkeeping platform enables users to track income and expenses, send invoices and issue estimates to clients. An industry-standard solution like QuickBooks makes it easy to maintain records and share them with your accountant at tax time.
QuickBooks Self-Employed integrates bookkeeping, invoicing and marketing into one platform, making it easy to track your business in one app.
Everlance, a mileage tracker that automatically generates IRS-compliant mileage logs: An app like this is essential for Uber and delivery drivers, travel writers, local sellers and any other solopreneurs who drive for their business. It also allows you to take photos of your receipts for expenses logged on the road, making tax time even easier.
Lunos.AI, an AI-powered accounts receivable platform: Even if you don’t need a full small business bookkeeping solution like QuickBooks, many contractors need a way to track invoices and get paid. Lunos.AI automates invoicing and collections and tracks payments and overdue accounts. Having all your invoices and payments in one spot makes it easy to cross-reference them against the 1099s you received to ensure they’re accurate.
Lunos.AI allows solopreneur service providers to easily send invoices and track metrics like “Days Sales Outstanding,” or how long it takes you to get paid after completing a project.
Many at-home tax software programs now use AI and automation to help track and upload receipts and tax documents year-round or all at once during tax time. After testing seven major tax software products, CNET found H&R Block to have the best use of AI and the best overall experience for freelancers and gig workers.
Separate business and personal expenses
Beyond using various platforms to track income and expenses, Salas also recommended a simple solution in case you forget to log a purchase or trip: Establish separate business and personal checking accounts. This helps you track income and expenses and sets your business up for success should you decide to incorporate and draw a salary later.
According to Salas, the big mistake is "mixing personal and business expenses from the very first day. He went on to say: "It just helps to have a separate checking account or at least a dedicated [debit or credit] card for your gig activity. It's so simple yet so overlooked.”
1099-K reporting threshold changes
Third-party settlement organizations such as PayPal and Stripe, which allow freelancers to accept payments by credit or debit card as well as via direct ACH, must report income through the platform if it exceeds a specific threshold.
The One, Big, Beautiful Bill retroactively raised that threshold to $20,000 in income or 200 transactions for tax year 2025. Under the American Rescue Plan Act of 2021, the threshold was set at $600 in total payments, with no minimum transaction amount. It’s important to note that the 1099-NEC and 1099-MISC thresholds were also raised from $600 to $2,000 starting in 2026. This is a massive change for contributors.
The lower threshold created confusion for many contractors. Often, a company that pays via Stripe or PayPal also issues a 1099-NEC for the work completed. This wouldn’t apply to Etsy sellers, but it may apply to service providers who work as contractors, such as web designers, SEO specialists and freelance writers.
If a contractor reports income on the 1099-K and the 1099-NEC, they’ll be overreporting and could owe more in taxes. It’s important to report all income to the IRS, but you’ll have to include an explanation.
Salas warned that there’s another element contractors often forget when they accept payments through platforms like Stripe, Cash App or PayPal.
“Many payment processors charge fees, and you receive the net amount,” he said. “However, your 1099-K has the gross amount you paid. If a platform takes a cut of your home money before you even touch the money, you still pay that expense. Fees don’t stop being deductible just because you never saw them.”
Be sure to write off the fees as a business expense to reduce your taxable income, he said.
Maximizing legal tax write-offs
While W-2 employees cannot deduct unreimbursed business expenses, gig workers and solopreneurs can deduct most business expenses to reduce their taxable income. These “ordinary and necessary” expenses may include your vehicle and associated costs, equipment and tools such as a phone and laptop, and software or apps you might use for your business.
You can also deduct the cost of tax prep and other service providers, such as a business coach or SEO specialist. Here are some of the most common deductions:
- Home office deduction: Gig workers who perform a portion of their work at home can write off their home office space (up to 300 square feet) if it is used exclusively for business. The IRS allows a simplified method for calculating the home office deduction: $5 per square foot. The actual expense method allows you to calculate the expenses for your home office, including a portion of your mortgage, electricity, and any home-related deductions.
- Vehicle expenses: You can deduct vehicle expenses if you use your car for business, even if you also drive it for personal use. You can only deduct the costs associated with business use. This may include your loan or lease payments, as well as gas, repairs and maintenance. As with the home office deduction, you can choose to take the standard deduction, which is 72.5 cents per mile, or you can calculate your actual expenses. Regardless of the method you choose, you can deduct parking fees and tolls separately.
- Technology and supplies: You can deduct any technology, supplies and materials you use for your business. This may include a laptop, printer, software or apps, and the business portion of your phone and internet service. You can also deduct costs such as web hosting and domain name purchases.
- Professional services and insurance: You can write off professional services such as tax preparation, legal fees, marketing services and business insurance.
- Health and retirement: If you purchase your own health insurance, you can deduct the cost of premiums. If you have a tax-advantaged retirement account, you can deduct your contributions up to the limits allowed by the IRS. For the 2025 tax year, you can contribute and deduct up to 25% of your income into a SEP-IRA, up to $70,000. Another option is a Solo 401(k), which follows the same rules and contribution limits of an employer-sponsored 401(k).
- Self-employment taxes: Self-employed taxpayers can write off the employer portion of their Social Security and Medicare tax contributions.
The self-employment tax and estimated quarterly payments
If you just started your business, you might discover a surprise at tax time if you didn’t consult with a tax professional.
Gig workers must pay self-employment taxes, which cover Social Security and Medicare, whereas W-2 workers split these costs between the employer and employee. Not only do gig workers have to cover these taxes themselves, which equal 15.3% of their income, but they must pay these taxes quarterly in advance.
If, by the end of the tax year, you haven’t paid at least 90% of the current year’s taxes, or 100% of the tax shown on the return for the previous year, you’ll pay a penalty. If your income fluctuates or your business is growing rapidly, the safe harbor rule protects you from estimating your taxes wrong. As long as you pay 100% of the prior year’s tax every quarter, you won’t face penalties.
“You can't assume every dollar that hits your bank account is good for you to spend if you're profitable. You still have taxes you need to pay and you can do those in one shot with penalties on your tax return or you can plan accordingly and pay those quarterly,” Salas said.
He explained that quarterly estimated tax payments may seem intimidating, but they’re simple once you understand the rules and reasons. “You’re just preparing your own tax bill because nobody is withholding it for you,” he said.
If you’re not sure how much you’ll need to pay, start setting aside a percentage of every payment your business receives. “Apply a conservative rate,” Salas suggested. “Withhold 30% for taxes, even if that’s not actually your tax bracket. When it’s time to pay, it’s just about allocating the right amount.”
Keep these dates in mind to ensure payments are submitted on time.
Income Period | Due by: |
Jan 1 - March 31 | April 15 |
April 1 - May 31 | June 15 |
June 1 - August 31 | September 15 |
September 1 - December 31 | January 15, 2027 |
Specialized tax advice for online sellers
Many solopreneurs have launched cottage industries selling goods. They might resell or dropship commercially made products or sell crafts, artwork and other handmade items on Etsy. There are currently 8.1 million active sellers on Etsy, according to Yaguara.co, but that’s only one place people sell items.
They can also sell on Amazon, eBay, Facebook Marketplace and other websites. When you sell products, you’ll gain access to additional deductions that service providers don’t have -- but you also may have more expenses associated with your business.
Cost of goods sold
Product sellers must track Cost of Goods Sold, or COGS, to ensure their venture is profitable and to write off all costs associated with purchasing, producing and shipping physical goods. Your COGS includes:
- Materials required to create items
- Manufacturing materials and tools (such as a sewing or Cricut machine)
- Cost of the actual item (if you’re reselling)
- Shipping materials
- Shipping costs
- Factory or storage costs
Inventory tracking
If you’re selling more than one-off items, you’ll need a way to track your inventory. You can use a simple spreadsheet or invest in a program like Sortly. Zoho Inventory is another effective option, with a Solo toolkit for solopreneurs. Some versions of QuickBooks also include inventory tracking.
Sales tax vs. income tax
People who sell physical goods shouldn’t confuse income tax and sales tax. You pay income tax based on your net profits from the sale of goods. On the other hand, you may have to collect sales tax and remit it to the state where the goods were delivered.
Platforms like Etsy may collect and remit sales tax on your behalf, which makes it easier to track.
If you’re confused about sales tax, it’s best to speak with a tax professional before getting started.
How to get started on the right foot
Start as you intend to finish is a good business adage when launching a side gig or a full-time solo business. That means following best practices from the time you work with your very first client and collect your first payment.
To keep things simple at tax time:
- Set up separate business checking and savings accounts.
- Set aside a percentage of each payment you receive for taxes.
- Use the right tools, such as accounting software or an expense tracker, to track your profit and loss.
“The more disciplined you are, the easier it is going to be,” Salas said. “If you make tracking income and setting money aside for taxes automatic, it’s not something you have to worry about.”
It’s smart for anyone launching a business or starting a side gig to consult a tax professional to discuss your specific situation and how the extra income may affect your finances.
