How Freelancers and Gig Economy Workers Can Prepare for Tax Season

The side hustle economy continues to grow. In a 2023 BankRate survey, nearly 39% of Americans juggled a side hustle on top of their full-time job—and 53% of Gen Z and 50% of Millennials were side hustlers. Furthermore, in a recent Self customer survey, 15% of respondents said they work multiple side hustles, and 17% reported having one side hustle.

If you're a freelancer or gig economy worker, you know how much more financial housekeeping you need to do. And come tax season, you can expect to be faced with extra hurdles to jump over. The good news is that there are things you can do today to make filing your returns easier.

We'll walk you through 8 steps you can take to best prep for the impending tax season:

1. Understand what it means to be self-employed

When you are self-employed, you're responsible for several types of taxes. Before we dig into the weeds, you're considered self-employed if you run your own business (this can be a part-time endeavor) or work as a sole proprietor or independent contractor. This includes doing a slew of side gigs, such as working as a food delivery person, ride-share driver or house cleaner.

Another way to know if you're self-employed? Come tax time, your employer sends you 1099s rather than W-2 forms. If you work a day job for an employer, you might receive a W-2 from your full-time workplace and also receive a 1099 from your separate side gigs.

2. Know your tax obligations

When you rake in freelance income, generally there are two main types of taxes you're responsible for:

Individual income taxes. Also known as personal income tax, these are taxes that hinge on your wages, salaries, interest, dividends, and other income, including self employment income, you receive in a given year.

You're responsible for paying individual income taxes at the federal level, and if you live in one of 43 states, or in the District of Columbia, where there's state income tax, you'll need to pay those, too.

Self-employment tax. If you work a day job, Social Security and Medicare tax (aka FICA) is split between you and your employer. Half is withheld from your paycheck, while the employer covers the other half. However, when you're self-employed, you need to cover all of it.

The self-employment tax rate is 15.3%, with Social Security making up 12.4% of it, and Medicare making up the remaining 2.9%.

3. Stay on top of your estimated taxes

If you work for yourself, either as a freelancer or a side gigger, you might need to pay what's known as estimated quarterly taxes. As the name implies, these are taxes on income that you need to pay throughout the year. When you are an employee working for an employer, your taxes are typically withheld by that employer each paycheck.

When you're self-employed, no federal or state tax is withheld. In turn, you're responsible for making payments. These estimated taxes are due April 15th, June 15th, September 15th and January 15th of the following year.

Ideally, you should've made these estimated tax payments throughout 2023 and kept a record of what you paid each quarter. That way, you'll have the information on hand to include on your tax returns for the 2024 season.

4. Know the tax forms you may need to file

Self-employed folks need to file a additional forms, which typically would include:

Schedule C. This is used to report the income or loss from your business, or side gigs as a sole proprietor.

Schedule SE (form 1040 or 1040-ES), Self-Employment Tax. This form is used to report your Social Security and Medicare taxes.

State income tax forms. If you live in a state that requires you to file individual income tax, you'll also need to file the respective form for that state. If you work and live in multiple states, you might need to file in several states. (See Section 8 below. It may be wise to get help from a tax professional in this instance.)

5. Gather the proper documents and information

To help you best prepare for tax season, you'll want to have some typical tax forms in tow. This can include:

1099-NEC. This is a wage statement you receive from a company or client you worked for during the year that reports your non-employee compensation.

W-2. If you have a day job where your employer withheld taxes, then as an employee you'll receive a W-2, which is a wage and tax statement. The W-2 is a summary of your compensation, taxes withheld and benefits in a certain year.

The deadline for an employer to send wage statements such as W-2s and 1099s to you is January 31st of each year, so by early February you should receive your 1099s.

6. Have your personal information ready

It's also a good idea to gather info so that when it's time to work on your taxes, it can go smoother.

This usually could include:

• Social Security number or tax ID number (TIN)
• If you have a spouse or dependents, their full name, date of birth, and SSN or TIN numbers
• Sources of income (W-2 forms, 1099s, rental income, retirement income, savings, interest or dividends, alimony, child support or government support)
• Property tax and mortgage interest
• Charitable contributions
• State and local taxes paid
• Educational expenses
• Vehicle taxes paid or personal property tax on vehicles
• An Identity Protection PIN (if you received one)
• Bank account and routing numbers to pay taxes and/or receive a refund. (You can also pay any taxes you owe with a debit card, credit card, or through PayPal. Fees apply.)
• Amount you paid on estimated quarterly taxes, if any
• Amount you put toward retirement contributions

Depending on your personal situation, you may need to provide additional information.

7. Be clued in to tax deductions

It's true that when you freelance or work in the gig economy, you usually need to dole out cash for additional expenses to run your business or work your side hustles. It's also true that you can scoop up tax deductions.

An expense must be "ordinary" and "necessary" for your business to be tax deductible.

A few common tax deductions that can lower your taxable income include:

• Office supplies
• Software and subscriptions
• Business-related travel
• Car-related expenses (if you use your car for work)
• Accounting and legal fees
• Bank fees
• Education
• Retirement contributions
• Professional subscriptions and dues
• Business insurance (i.e., professional liability insurance, general liability insurance)

What you can deduct on business expenses depends on the type of work you do. For instance, if you side hustle as a rideshare driver, you can typically deduct car related expenses. To make sure you know all the tax deductions available to you, you'll want to work with a tax professional.

8. Consider getting help from a tax professional

Working with a professional tax preparer can help file your taxes on time and accurately. You can use the IRS tax return preparer directory to see which professionals have specific credentials.

It's a good idea to find someone as early as possible during the tax season. That way, you'll have ample time to gather your documents and information for the professional to do their job.

An added bonus? Aim to work with a tax preparer with experience in preparing and filing returns for self-employed freelancers and gig economy workers. If you generally earn $64,000 or less in a given year, you can also get free assistance through the IRS's Volunteer Income Tax Assistance (VITA) program. VITA sites are set up throughout the country during tax season.

Bottom line

Doing your taxes as a freelancer or member of the gig economy can feel like curve balls being tossed at you. But by preparing well ahead of time, you can smooth out any bumps in the process. Plus, by working with a professional, you can leave no stone unturned with business tax deductions.

About the author

A personal finance writer for over 8 years, Jackie Lam covers money management, lending, insurance, investing, and banking, and personal stories. An AFC® accredited financial coach, she is passionate about helping freelance creatives design money systems on irregular income, gain greater awareness of their money narratives, and overcome mental and emotional blocks.

Her work has appeared in publications such as Bankrate, Time's NextAdvisor, CNET, Forbes, Salon.com, and BuzzFeed. She is the 2022 recipient of Money Management International's Financial Literacy and Education in Communities (FLEC) Award, and a two-time Plutus Awards nominee for Best Freelancer in Personal Finance Media. She lives in Los Angeles where she spends her free time swimming, drumming, and daydreaming about stickers.

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