Freelance Taxes Don't Have to Be Scary. 5 Tips From a Professional Side Hustler

I was terrified of taxes when I started my first side hustle. 

I don’t know which was worse: the 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. Either way, I put off handling 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, and I loved the freedom and flexibility of the gig. As I tried out different side hustles — brand ambassador, pet sitter, blogger, writer and consultant, to name a few — my taxes only became more complicated. 

Today, I still embrace a portfolio career made up of different side hustles. I work primarily as a freelance writer and run my blog, I Like to Dabble, a platform designed to help LGBTQ+ and neurodivergent folks level up their lives and income. But I’m no longer scared every time tax season rolls around. 

Whether you’re new to side hustling or you’re a seasoned freelancer looking for tax pointers, here are five tips I wish I knew about self-employment taxes when I first started out.

Read more: I’ve Tried Dozens of Side Hustles. Here’s How to Find the Right Fit to Boost Your Income

Ready to file your freelance taxes? Check out CNET’s tax partners.

1. Freelancers pay two types of taxes: Self-employment and income taxes

I knew nothing about estimated taxes as a newbie freelancer. Taxes are pretty straightforward when you work as a W-2 employee for a company because your employer generally withholds taxes for you based on how you fill out your W-4 (PDF). That’s not how it works when you’re a sole proprietor — the term the IRS uses to classify freelancers and side hustlers.

Any income you make that’s not taxed is usually considered self-employment income, and you’re responsible for paying both self-employment tax and income tax on those earnings. That’s an important distinction — if you just calculate income tax, you could end up with a surprise tax bill.

Self-employment tax requires you to pay 15.3% of your total earnings. This tax is levied to pay into Social Security and Medicare. When you work a traditional job, your employer usually covers half of this cost. When you’re self-employed, you’re responsible for paying both the employee and employer portions.

Income tax is the tax levied by the federal, state and local governments. When you’re self-employed, you can figure out your income tax bracket by looking at your previous year’s earnings or estimating the amount you expect to make that year. Since you won’t pay income tax each time you get paid, like you would as a W-2 employee, the IRS requires you to make quarterly estimated tax payments if you expect to owe $1,000 or more for the year. Depending on the state you live in, you may also need to make estimated payments to your state’s department of revenue.

2. Hiring an accountant is worth every penny

I found it difficult to manage my estimated taxes until I got in touch with an accountant. I should have hired an accountant sooner, but it felt like something only wealthy people did. 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 tax deductions I could claim 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.

Read more: I Work From Home. Does That Make My Internet a Tax Write-Off?

3. Find a tracking system that works 

Tracking your income, expenses and profit will help you navigate tax season like a pro. As a side hustler, you’re taxed on your total profit, which you can calculate by subtracting your expenses from your income. 

You can either manually track these items via Google Sheets or automate tracking through free tools like Wave Accounting and Lunafi. I especially love Lunafi because it’s designed for folks who have a day job and side hustle, so it gives you a complete view of your finances in a user-friendly mobile format. 

There is also free tax preparation available to qualifying individuals through the Volunteer Income Tax Assistance (VITA) program offered by the IRS. To qualify, your income must be below $60,000. Another free option to use is FreeTaxUSA.

Read more: I Hate Accounting Software. Here’s How I Manage My Freelance Taxes Instead

4. You may not 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. 

1099s can make managing your income easier as a freelancer. Come tax time, you can combine your 1099s to figure out how much you made and compare that to your bank statements and the financials you’ve been tracking. There are three possible types of 1099s freelancers could receive: a 1099-NEC, 1099-K or a 1099-MISC. Use the table below to understand their key differences.

Although the IRS is tightening up on 1099 requirements, there’s still a chance you won’t receive a 1099 for freelance work you completed. Even if this happens, it’s still your responsibility to report these wages (that’s why we track them!). It wasn’t until I started my website and diversified my income streams that I realized this.

5. Brush up on your state’s tax requirements

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 in 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. 

Washington also has another tax that businesses are responsible for paying called the Business and Occupation (B&O) Tax. Since my side business is now an LLC, I’m responsible for paying this tax, too. 

To stay informed on any tax changes in my state, I work closely with my accountant and check the Washington Department of Revenue website, which is also where I go to pay these state-specific taxes. To check any state tax requirements in your state, start with their Department of Revenue and sign up for their newsletter to receive updates and alerts as they come. 

Side hustle taxes don’t have to be overwhelming

When you don’t earn income via the traditional 9-to-5 gig, your taxes get more complicated. But with some preparation, research and professional advice, they’ll become much easier to tackle.

My biggest tip? Don’t be afraid to ask for help. 

Ready to file your freelance taxes? Check out CNET’s tax partners.