When I first started my side hustle as a web developer, I was thrilled by the freedom and flexibility it offered. However, as I delved into various side hustles like brand ambassador, pet sitter, blogger, writer, and consultant, I quickly realized that managing my finances, especially taxes, was becoming increasingly complex. The anxiety and dread that came with the thought of handling my freelancer taxes, coupled with the fear of the IRS, made me put off dealing with my side hustle finances for far too long. It was a mistake that I hope others can learn from.
Today, I have embraced a portfolio career consisting of different side hustles, primarily working as a freelance writer and running my blog, “I Like to Dabble.” This platform is designed to help LGBTQ+ and neurodivergent individuals level up their lives and income. Despite still juggling multiple side hustles, I no longer feel terrified when tax season rolls around.
For those who are new to side hustling or seasoned freelancers looking for tax pointers, here are five tips that I wish I had known about self-employment taxes when I first started out.
1. Freelancers pay two types of taxes: Self-employment and income taxes
As a newbie freelancer, I was clueless about estimated taxes. Unlike traditional W-2 employees whose employers withhold taxes based on their W-4 forms, freelancers, or sole proprietors, are responsible for paying both self-employment tax and income tax on their earnings. Self-employment tax amounts to 15.3% of total earnings and is used to contribute to Social Security and Medicare. On the other hand, income tax is levied by federal, state, and local governments. Freelancers are required to make quarterly estimated tax payments if they expect to owe $1,000 or more for the year.
2. Hiring an accountant is worth every penny
Managing estimated taxes became much easier for me once I hired an accountant. Despite initially feeling hesitant about the cost, I soon realized that hiring an accountant was invaluable. They helped me understand how to withhold extra taxes with my employer to cover my estimated taxes for my side hustle. Additionally, my accountant provided insights on sales tax, tax deductions, income and expense categorization, and monthly bank reconciliations, giving me a crash course in business financial management.
3. Find a tracking system that works
Tracking income, expenses, and profit is crucial for navigating tax season effectively. Whether using Google Sheets or automated tools like Wave Accounting and Lunafi, tracking finances helps freelancers calculate their total profit by subtracting expenses from income. Free tax preparation services like the Volunteer Income Tax Assistance (VITA) program and FreeTaxUSA are available to qualifying individuals.
4. You may not receive a 1099 for your side hustle work
While 1099 forms simplify income management for freelancers, there is a chance that you may not receive one for freelance work completed. It is essential to report these wages even if a 1099 is not received. Understanding the different types of 1099 forms, such as 1099-NEC, 1099-K, and 1099-MISC, can help freelancers accurately report their income.
5. Brush up on your state’s tax requirements
Freelancers offering services or products may be subject to specific state taxes, including sales tax. Understanding state-specific tax requirements, such as sales tax and Business and Occupation (B&O) Tax, is crucial for compliance. Working closely with an accountant and staying informed through state revenue department websites can help freelancers navigate state tax obligations effectively.
In conclusion, while side hustle taxes may seem overwhelming, with preparation, research, and professional advice, they can become more manageable. Don’t hesitate to seek help and leverage resources to ensure compliance and financial stability in your side hustle endeavors.
