Tax Considerations for Freelancers and Gig Workers in 2025
Earlier this year, LinkedIn conducted a study that revealed 31% of US workers have a side hustle (Source). Whether this is the early stages of developing a hopefully full-time venture, or just a way of bringing in some extra income, taking on freelance or gig work can be an exciting challenge. Whether you're designing websites, driving for a ride-share app, delivering food, or working to build a business of your own, working independently has its perks—freedom, autonomy, and flexibility! You should be aware, however, with that newfound freedom comes new responsibilities, especially as it pertains to tax planning.
Unlike those with a traditional employment situation, freelancers and gig workers are considered to be self-employed, meaning they are responsible for not only the financial recordkeeping of the activity, but also any tax obligations that may arise. If you're diving into self-employment this year, or if you’ve been freelancing and want to be sure you’re checking all the boxes, here’s what you need to know to make tax time a breeze.
Understanding Self-Employment Tax
As a freelancer, you are considered a sole proprietor unless you have registered as a business entity of some kind. As a sole proprietor, your earnings from the business activity are subject to not only income tax, but also self-employment tax. If you have experience working a traditional job where you receive a W2, you are no doubt familiar with Social Security and Medicare taxes. Your employer withholds the employee portion from your paycheck and then will pay the employer portion themselves. Self-employment tax is the way you will pay this, since there is no employer to withhold this. The self-employment tax rate is 15.3%, which is effectively 7.65% for the employee portion that traditionally would have been withheld from your paychecks under a traditional arrangement, and 7.65% for the employer portion, which you are now responsible for.
Financial Record Keeping
When operating as a gig worker, it is very possible you will be issued a 1099-NEC or 1099-K showing your income from various platforms. However, it is both wise and best practice to keep records throughout the year for yourself, to ensure that A.) everything is captured, and B.) you have information throughout the year to use in tax planning, not waiting on the 1099s after year end. Whether you use software like QuickBooks, or simply track transactions in a simple organized spreadsheet, it is important to capture all of this information in a format that makes it usable for you. As a way to make this even easier, it is good practice to have a separate and dedicated bank account solely for your business.
On the other side of the equation are deductions from income, and it is equally important to track and categorize these business expenses. Any legitimate business expense offers a reduction in your taxable income, so it is of paramount importance to maintain timely and accurate records of these transactions throughout the year. It is a good idea to be familiar with the deductions common to your business activity, but some general examples could be advertising, office supplies, and business-related software. The key to knowing what is a deductible expense is knowing what is both ordinary and necessary to participate in the business activity in question.
Estimated Tax Payments
The IRS requires that you pay in 90% of your current year tax liability or 100% of your prior year tax liability (or 110% for higher earners), throughout the year. This means if you pay no tax throughout the year and plan to pay it all on tax day, you will be assessed a penalty. This typically isn’t an issue for most taxpayers, since employers will often withhold income tax throughout the year from your paycheck. This isn’t the case for freelance income, so the IRS expects you to pay in estimates, based on the percentages above, on a quarterly basis. If you need help estimating what your income will look like and how much your quarterly payments need to be, it may be a good idea at that point to consult a tax professional.
Using a Tax Professional
Speaking of tax professionals, how do you know when is the right time to approach one? Filing taxes as a self-employed individual is usually more complex than a W-2 employee. The more success you start to have in your venture, the more complicated the tax picture can become. While good software makes it feasible to file on your own, a professional provides his or her value in the areas of proactive tax planning and optimizing potential deductible expenses.
If you feel you are at that point of complication, or you are worried you are leaving money on the table by paying more in taxes than you owe, it may be a good time to consult with a CPA who specializes in these areas and can help you evaluate your specific situation.
Freelancing offers a great way to earn some extra income and of course could lead to a whole new career. With it, however, comes added financial responsibilities that cannot be ignored. By honing your understanding of how self-employment tax works, planning for quarterly payments, and being thorough in tracking your income and expenses, you can avoid crucial mistakes that many make when entering the world of self-employment. Remember that it doesn’t have to be sophisticated, you just need a detailed and organized system that works for you. But remember that with success often comes complication, and at that point it may be wise to consult with a professional. Whether you’re side hustling to earn a few extra dollars for your family or going full-time freelance, smart tax planning is crucial. As the saying goes, failing to plan is the same as planning to fail.
At Sigma CPAs, we're more than tax preparers—we're proactive partners for business owners. Based in Jackson, TN, we provide accounting, consulting, and tax services designed to deliver accurate, timely insights and strategic planning. Our CPAs help you stay ahead of challenges, reduce tax liability, and navigate an ever-changing financial landscape with confidence.