Tax Season Resource

Who has to pay self-employment taxes?

According to the IRS, “You must file a tax return if you have net earnings from self-employment of $400 or more from gig work, even if it’s a side job, part-time or temporary.” That includes pet-sitting through Rover, mowing lawns with TaskRabbit, or virtual assistant-ing on Upwork. 

The tricky thing is, unlike the W2s sent by every employer, you might not receive any gig or freelance tax forms in the mail. 

When you’re an “independent contractor,” companies only need to send you a 1099-MISC if they paid you more than $600 during the year. If they sent your payments via PayPal, they only need to send a 1099-K if they paid you more than $20,000 or more than 200 times.

But no form ≠ no taxes. “The biggest misunderstanding is if you don’t get a 1099, you don’t have to report it on your tax return,” says Rosalind W. Sutch, a certified public accountant and shareholder at Drucker & Scaccetti. 

While it’d be nice to ignore any income that was unaccompanied by 1099s, it’s illegal. As a self-employed person, you need to track and record your earnings — and report them on your tax return, even if you don’t get a form in the mail. 

1. Separate your financial accounts

One common self-employed tax mistake — which, according to Sutch,“causes way more hassle than is necessary” — is failing to separate your business and personal expenses.

“It’s a lot easier to go through a couple [business] transactions a month than to go through them when all of your personal expenses are mixed in,” Sutch says. “So I recommend you start from day one: Open up a separate bank account and separate credit card, and use them exclusively for business purposes.”

Don’t worry, however, about opening an official “business bank account” or “business credit card.” You can use a regular checking account and credit card for your business; all that matters is they’re separate from your personal accounts. 

2. Track expenses

A study from Xero found that 25% of freelancers struggle to track their expenses — and that 73% don’t deduct any expenses at all. Don’t let this be you! 

When you don’t deduct business expenses from your taxes, you’re essentially giving a free donation to the federal government. Which is nice and all… but wouldn’t it be better to have some more money in your travel fund instead?

As a self-employed person, the IRS lets you deduct the cost of any “ordinary and necessary” expenses for your business. If you drive for Lyft, for instance, this could include gas, parking fees, car repairs, and insurance.

Just make sure you keep your receipts. While you won’t need to furnish them when you file, you will need them if you’re audited (and no, credit card statements don’t count). These days, many online accounting programs come with apps that allow you to easily scan receipts from your phone. 

“It’s really important that freelancers understand they need to keep good records,” Kuntz says. “If you don’t have good records and you get selected for audit, you could have disallowed expenses.”

3. Save 30% of your income

The most painful experience for any new freelancer or side hustler is forgetting to set aside money for taxes, then getting hit with a huge bill in April. 

Sutch frequently sees this with her clients. “They think they’ll save later from those later earnings,” she says, “but then those dollars are gone and they don’t have the money to pay their taxes when they are due.

To avoid this unpleasant scenario, create a separate, fee-free online bank account for your taxes. (Yep, another one, in addition to your personal and business checking accounts). At the end of every week, transfer 30% of your earnings from your business checking account to your tax savings account. 

While that might sound high, keep in mind you need to cover both your self-employment tax (15.3%), your federal income tax (see the brackets here), and your state tax. If you or your spouse has a high income, or if you live in a high-tax state, such as New York or California, or high-tax city, such as NYC, then you might want to set aside even more.

Fantastic digital tools for freelance taxes

• FreshBooks & Wave for painless cloud accounting
• Everlance & Stride for tracking mileage and expenses

4. Make estimated payments

When you work a regular job, the IRS gets a chunk of your paycheck every two weeks. When you’re self-employed (and paycheck-free), it’s left out of the loop. The IRS doesn’t like being left out of the loop, which is why you need to pay taxes four times a year. 

That’s right: If you’re self-employed and anticipate owing more than $1,000 in taxes for the current year, you’ll need to make quarterly “estimated payments” to cover your tax burden.  

Here are the deadlines:

• April 15, for income earned from January 1 through March 31
• June 15, for income earned April 1 through May 31
• September 15, for income earned June 1 through August 31
• January 15, for income earned September 1 through December 31

To determine how much you should be paying, you can talk to a tax professional or use an estimated tax calculator. You can also read up on how to avoid an underpayment penalty

Then, set quarterly reminders on your calendar, and a few days before each due date, transfer money from your tax savings account (told you that’d come in handy) to the IRS via the Electronic Federal Tax Payment System. 

5. Don’t be afraid to get help

If you’re not prepared, taxes can quickly turn your self-employment dream into a nightmare. 

So while this guide is a start, it isn’t meant to replace the advice of a professional. If you have questions or feel overwhelmed, search online for a reputable accountant. Or check out the IRS’s new Gig Economy Tax Center, which is a good resource, too.

And if you’ve ended up with a tax bill you can’t pay, don’t panic. File your taxes before April 15, and contact the IRS to discuss payment plans. 

Whatever you do, just take it one step at a time — you got this! 💪🏼