Freelancer Taxes: A Guide for Filing With a Side Hustle

Picking up a side hustle or becoming your own boss full-time can change a lot in your life, including your taxes. If you did any freelance or independent contract work last year, here's a guide to help you understand some of the major to-dos in managing your taxes.

Receiving payments from clients

Your clients may send you a Form 1099 showing how much they paid you during the year. You’ll need these forms to tally and report your income from your side gig.

• Major forms involved: 1099-NEC, 1099-K

• What it means: If you receive a 1099, don’t dismiss it — whoever sent it to you also sent a copy to the IRS, so it wouldn't be a good idea to leave that information off your tax return. Also, if you did work for a client that hasn’t sent you a 1099, you probably still need to report the money you earned there. Income, even if it’s paid in cash, generally has to be reported unless the law specifically exempts it.

» MORE: Using Venmo for business? How Venmo taxes work

Making estimated tax payments

Taxes are a pay-as-you-go arrangement in the United States. When you earn money, even from a side gig, the IRS wants its piece as soon as possible. That’s why employers withhold taxes from employee paychecks. However, because you’re not an employee, you may need to make estimated tax payments during the year.

• Major forms involved: 1040-ES, W-4

• What it means: Every quarter or so, you may need to estimate your tax liability and pay the IRS. Waiting until the tax filing deadline to do it all at once could mean paying penalties and interest. If you have a partner with a regular job and you’re filing jointly, you might be able to avoid the quarterly hassle. “What we'll typically recommend is that you get an estimate of what your total tax liability is going to be from all income sources and then just jack up your withholding from work. That way it's automating it for you, and you don't have to go through this really conscious effort every quarter,” says Micah Fraim, a certified public accountant in Roanoke, Virginia.

» MORE: Estimated tax payment deadlines

Filing your tax return at tax time

You'll probably need to file a Schedule C. This is where sole proprietors can report their business income and expenses.

• Major forms involved: Schedule C

• What it means: At tax time, a lot of your record-gathering and number-crunching will revolve around completing this form. As a result, you may need to spend more on advanced tax software or human tax preparers.

» MORE: Learn how to get an employer identification number (EIN)

Taking advantage of tax deductions

Generally speaking, expenses involved in operating your business can be tax-deductible. IRS Publication 535 lays out many of the rules. Plus, because of the qualified business income deduction, you may qualify for a deduction of up to 20% of your side-gig income.

• Major forms involved: 1040, 8995

• What it means: You could end up with a lower tax bill. If your total 2023 taxable income was at or below $182,100 for single filers or $364,200 for joint filers, you’re more likely to get this tax break^[0]

  Internal Revenue Service. Form 8995: Qualified Business Income Deduction Simplified Computation.

  View all sources

  . People over the limit may still get a partial break, but the rules get more complicated.

» MORE: 15 self-employment deductions to know about

Understanding the taxes you might need to pay

You may need to pay self-employment tax. The IRS imposes a 12.4% Social Security tax and a 2.9% Medicare tax on your net earnings. Typically, employees and their employers split that bill. But self-employed people pay the whole thing.

• Major forms involved: Schedule SE

• What it means: For the 2023 tax year, only the first $160,200 of earnings was subject to the Social Security portion^[0]

  Social Security Administration. Contribution And Benefit Base. Accessed Jan 12, 2024.

  View all sources

  . A 0.9% additional Medicare tax may also apply if your net earnings from self-employment exceed $200,000 if you’re a single filer or $250,000 if you’re filing jointly^[0]. To calculate how much you’ll owe, you may need to add Schedule SE to your tax filing to-dos.

Setting up your own freelancer retirement plan

Going solo usually means saying goodbye to employer-sponsored retirement plans, but who says you can’t start your own? Solo 401(k)s and Simplified Employee Pension Individual Retirement Accounts (known as SEP IRAs) offer ways to have a side gig and still build a nest egg, and the contributions could be tax-deductible.

• Major forms involved: 1040, Schedule C

• What it means: “It lessens the pain of how much you're having to shell out to the government if you're funding your own retirement account,” Fraim says.

Hiring someone versus doing it yourself

Taxes are complicated, and they can be even more complicated when you have a side gig. There are extra forms to fill out, along with many rules about the right way to report your income and even more rules about how to handle your expenses. Hiring someone to do your taxes could be a good move, but if you're confident with taxes you might save money doing them yourself.

• Major forms involved: Quite a few. See our picks for the best tax software, including packages for the self-employed. We also have a list of questions you should ask when searching for a CPA or tax accountant near you.