Picking up a side hustle or becoming your own boss full-time can change a lot in your life, including your taxes. If you earned income from freelance or independent contract work last year, here’s a guide to help you navigate the key tax responsibilities that come with side hustles.
Receiving Payments from Clients
When you work as a freelancer, you’ll often receive payments directly from clients, and these payments must be reported to the IRS.
- Major forms involved: 1099-NEC, 1099-K
- What it means: Your clients may send you a Form 1099 to summarize the payments they made to you over the year. Always retain these forms, as a copy is also sent to the IRS. If you earned income from a client who didn’t provide a 1099, you’re still required to report that income, even if it was paid in cash or through digital platforms like Venmo or PayPal. Neglecting to report any income could lead to penalties.
Making Estimated Tax Payments
Freelancers don’t have taxes withheld from paychecks like traditional employees. Instead, you may need to make estimated tax payments throughout the year.
- Major forms involved: 1040-ES, W-4
- What it means: The U.S. tax system operates on a pay-as-you-go basis. If you wait until the end of the year to pay your taxes, you could face penalties. To avoid this, calculate your estimated tax liability and make quarterly payments. If you have a partner with a regular job, you might increase their withholding to cover both of your tax obligations, simplifying the process.
Filing Your Tax Return
When tax season arrives, you’ll need to file additional forms to report your side hustle income and expenses.
- Major forms involved: Schedule C
- What it means: Schedule C is used to report business income and expenses. Accurate record-keeping throughout the year will make completing this form easier. Many freelancers also invest in tax software or hire professionals to ensure accuracy.
Taking Advantage of Tax Deductions
One benefit of freelancing is the ability to deduct business-related expenses, which can lower your taxable income.
- Major forms involved: 1040, 8995
- What it means: Expenses like office supplies, internet service, and professional subscriptions may be tax-deductible. Additionally, freelancers may qualify for the qualified business income (QBI) deduction, which can allow a deduction of up to 20% of your business income, subject to income thresholds and other criteria.
Understanding Self-Employment Taxes
As a freelancer, you’re responsible for paying self-employment taxes, which include both the employer and employee portions of Social Security and Medicare.
- Major forms involved: Schedule SE
- What it means: For 2024, self-employment tax includes a 12.4% Social Security tax on the first $168,600 of earnings and a 2.9% Medicare tax. If your income exceeds certain thresholds, additional Medicare taxes may apply. Be sure to calculate these taxes and include Schedule SE with your return.
Setting Up a Retirement Plan
Freelancing doesn’t come with an employer-sponsored retirement plan, but you can set up your own.
- Major forms involved: 1040, Schedule C
- What it means: Options like Solo 401(k)s or SEP IRAs allow you to save for retirement while reducing your taxable income. Contributions to these accounts may also qualify as a deduction, helping you save for the future and reduce your tax burden.
Hiring a Tax Professional vs. DIY
Taxes can become more complicated with a side hustle, leading many freelancers to seek professional help. If you’re comfortable managing taxes yourself, consider advanced tax software tailored for self-employed individuals. However, if your taxes involve complex situations, hiring a certified public accountant (CPA) or tax preparer with experience in freelance taxes can be invaluable. Ensure the professional you hire has a valid PTIN and is qualified to represent you before the IRS.
Managing taxes as a freelancer can feel overwhelming at first, but with proper planning and tools, it becomes more manageable. Stay organized, keep detailed records, and leverage deductions to minimize your tax liability. Whether you tackle taxes on your own or hire a professional, understanding these basics will set you up for success as a freelancer or independent contractor. Evaluate your specific needs and choose the tools that align with your workflow and goals. With the right toolkit, you’ll be well on your way to building a successful freelancing career. If you're looking for some different freelancing ideas, be on the lookout for our latest gigs as we update them regularly.
