Have a Side Hustle? Here’s How NOT to File Your Taxes

Have a Side Hustle? Here’s How NOT to File Your Taxes

When you have a side hustle, it's important to set aside money for taxes. Don't make these mistakes!

Have a Side Hustle? Here’s How NOT to File Your Taxes

    I’ve been a freelance writer for almost a decade. It’s a fun career with a lot of upsides (freedom!) and downsides (deadlines!). Most importantly, it pays the bills.

    You probably don’t recognize me by name, but if you’ve spent time online, there’s a good chance you’ve read my work. I’m a ghostwriter, meaning about 99% of what I’ve written is published under other people’s names. (Yeah, sorry to break it to you, but you can’t take everything you read on the internet at face value)

    I’m stepping out of the shadows to share a story about a topic near and dear to my heart—taxes.

    My career has taught me a lot about various subjects. Most of the lessons have come through research in the service of whatever I’m writing. For instance, I can tell you about trademarks, cybersecurity, business transactions, cognitive behavioral therapy, how Facebook ads work, why artificial banana flavor doesn’t taste like banana—the list goes on.

    And while I can speak about taxes from that same removed, academic standpoint, this particular blog post is based on personal experience. It wasn’t easy for me to write, for reasons you’ll understand later. But that’s enough preamble. Let’s get into the story, which starts with how I became a freelancer.

    I backed my way into a freelance career.

    I thought I was interviewing for a part-time job.

    The Craigslist posting read “Administrative Assistant – 20 hours/week.” It seemed like a good enough fit—not that I knew what my “fit” was. I was 22 years old and had just been laid off. For three months, I’d been working as a salesperson at a print shop specializing in vinyl signs for furniture stores. My job was to call people and ask them if they needed banners, window decals, standees, and the like for their next store opening or clearance event. It was my first job out of college, and a job I was stupendously bad at (in three months, I’d closed exactly zero sales).

    Administrative assistant-ing would be easier, I thought, or at least it would involve fewer cold calls. If nothing else, I would have better flexibility. I could work half the week and spend the other half babysitting, tutoring, learning to code—whatever it was new adults are supposed to do to find their footing in the world.

    Back to the interview. We were meeting at a coffee shop (which should have been my first clue—every other interview I’d done had been held at an office). We were getting along well. The woman I was speaking to was smart, friendly, engaging—she’ll make a great boss, I thought. The feeling seemed to be reciprocal. She told me she’d like to offer me the job, but that there was something I should know first.

    “So, I hope this won’t be too much of a problem, but I think I had a typo in the listing,” she said. “It’s not going to be 20 hours per week—more like 20 hours per month.”

    My stomach dropped. But I resolved to remain positive. I’d make this work.

    My life was about to fundamentally change.

    I accepted the offer and immediately started planning my next move. If I could find other positions like this, maybe I could cobble together something resembling full-time employment. Or maybe, I thought, this could be an opportunity—a chance to redefine my idea of a job, to free myself from the confines of the 9–5, 40-hour workweek. If I had a few small gigs or side hustles, and they paid well enough, I even could carve out time to do what I really wanted to do: write a book.

    So I hustled. I went back to Craigslist, and LinkedIn, and Indeed, and Monster. I applied for everything. I asked family and friends for leads. I grew my network. I took a typing test at the temp agency down the street. I met with people in offices, at coffee shops, in bars, online, over the phone—all kinds of people, in all kinds of environments, offering all kinds of work.

    I was beginning to get a sense of my fit. Soon, I landed another gig, and another. Meanwhile, I reveled in my unexpected autonomy. I could work where, when, and as long as I wanted. I could sleep in late. If I wanted to, I could spend the whole day at home, in my pajamas—and I did, frequently.

    I also learned that “20 hours per month” was a malleable target. If I could convince one of my bosses that a project would take 25 or 30 hours, they didn’t seem to mind. They hardly acted like bosses at all, rarely checking in on me or telling me I needed to be doing something differently. Instead of asking me to enter my time somewhere, they expected me to send quotes and invoices (which I learned how to create after some frantic Googling). I assumed this was how some employers must do business. I was happy to oblige—to say yes to anything and everything, knowing I could eventually figure it out.

    After about nine months, I had accumulated enough gigs to establish a steady stream of income. In fact, I was even making a little more than I had been at my previous job.

    And then…

    Along came tax season.

    Yes, I had filed taxes on my own before, but I wasn’t prepared for what I was about to experience.

    In the past, all I’d had to do was open my tax software, plug in my W-2, select “no” a bunch of times (“Do you have any dependents?” No. “Mortgage interest?” Nope. “Gambling losses?” Definitely not), and hit “file.” The only thing I cared about was the number in the corner, indicating how much money I could expect the Internal Revenue Service to send me in a month or so.

    This time, I couldn’t just click my way through. I had multiple sources of income and I wasn’t sure how or where to report them, or if I even needed to report them. I rifled through the piles of paper in my apartment and found several envelopes containing 1099s, then found a page where I could enter the dollar amounts. My estimated refund, the magic number in the corner, changed from $0 to a negative five-digit number.

    Weird. I thought it must be a glitch or procedural quirk—something that happens when you file 1099s and bounces back up when you finish.

    Next, I was prompted to list my business expenses. Huh? I hadn’t thought about what I was doing as a “business.” Nor had I really considered what I was spending on work, reckoning that it would all somehow even out. (Again, I was 22.) I certainly hadn’t held onto any receipts.

    So, I skipped through the business expense section, and the software recommended I claim the standard deduction. I did, and watched the magic number lower (or raise?) by a modest amount.

    At this point, I started to worry. I continued on, clicking “no” after “no.” The number didn’t budge. More clicking, more “nos,” same number. My heart raced. Soon, I had reached the end of the questionnaire. A message appeared on the screen.

    “Your federal balance due is: $10,667.”

    I had fucked up. Bad.

    I was dumbstruck—emphasis on “dumb.” Why did I owe? Shouldn’t I be getting a refund? And if I did owe, how could it possibly be that much? I had only made about $30k. How could the IRS expect me to pay a third of my income?

    For the first time, I understood why people hate taxes.

    As I had for everything else in my adult life, I turned to Google for answers. I searched like a Neanderthal who’d committed a white-collar crime: “why tax bill so high,” “why owe taxes,” “why no refund,” “too many taxes,” “IRS mistake.”

    I learned a lot that afternoon. I’m not exaggerating when I say it completely altered my self-conception and sense of reality. Looking back, all I remember is a feverish haze. I’m not sure where I found this information or what order I learned it in, but here’s what I figured out:

    1. I was a sole proprietor, not an employee. I had heard the term “freelancer,” but I had no idea I was one, or that it was any different than conventional employment. Turns out freelancers are sole proprietors, meaning they’re responsible for paying their own income taxes. No one had ever explained what freelancing was to me—we didn’t learn it in school—or warned me there might be financial consequences of working as a freelancer.

    2. I really did owe that much. I was on the hook for unpaid income taxes as well as self-employment taxes—the portion of my income meant to help fund Medicare and Social Security. A rough calculation suggested I should have set aside about 40% of my income for taxes.

    3. I should have been paying quarterly taxes. Sole proprietors need to make estimated payments to the IRS, every quarter: on or before the middles of April, June, and September of the filing year, and the middle of January of the following year. I had no idea this was a thing, and my tax bill was even higher because I’d missed the deadlines.

    4. My “bosses” were actually my clients, and I had been undercharging them. Waaaay undercharging them. I’d been working for basically minimum wage. Except when you work minimum wage, the employer deducts taxes for each paycheck on your behalf. If I’d known my actual tax burden, I wouldn’t have accepted such low-paying work.

    5. I needed to keep track of my expenses. In retrospect, this should have been obvious (this all should have been obvious), but I just wasn’t thinking about it. People who saved their receipts had always seemed fussy and bizarre to me. I assumed they were doing it for reasons of paranoia, like they were afraid CVS would call them and tell them they owed 17 cents for a bag of Fritos, and the only way they could prove it was with a slip of paper. I didn’t realize I could or should itemize business deductions, or even what a deduction was.

    Learn from my tax mistakes.

    The biggest realization was that I needed to do this all myself. I needed to take the lead. Nobody was going to hold my hand and walk me through it.

    It’s not that I expected the world to take care of me. My real reasoning was perhaps even more naïve. I thought taxes were a formality—like speed limits. I imagined the IRS was simply always collecting money from people’s accounts through some invisible, automated system, holding on to a bit extra (just in case, I guess?) and then giving that portion back to us every year as a kind of… holiday?

    I don’t know—it sounds completely insane when I write it out. Maybe I was thinking the IRS was handling my taxes for me. In any case, I trusted that they must know everything or at least know better than me.

    Ironically, the world did take care of me in this situation. My great aunt passed away right around the time I was filing my taxes, leaving my brother, cousins, and me with $20,000 each. Half of that went straight to the federal government, and a good chunk went to the state (which I also owed).

    I wish I could say that after that harrowing experience, I learned my lesson completely. But I didn’t. I fucked up my taxes (less badly) the next year, and missed the mark again a few years later. I’ve underestimated my income, failed to account for changes in my tax bracket, thought I could get creative with deductions, and so on. I’ve never missed a filing deadline or sent the IRS a fraudulent return, but I have needed to pay back thousands over the years. March and April are not fun months for a freelancer.

    I should also mention that I’m exceedingly lucky. Privileged, in fact. I’ve been able to get away with assuming things will work out because, for me, they have. I’ve had a lot of help from my family. I haven’t had to deal with student loans. I’ve never received a massive medical bill I couldn’t pay. I haven’t had any kind of debt hanging over me for longer than a few weeks.

    Okay, here comes the hard part. I will give myself some credit. I’ve maintained great relationships with my clients, kept my business going through referrals alone, and generated hundreds of thousands of words—maybe millions at this point. In that sense, I’ve written the equivalent of not just one but several books. I’ve also consistently earned a higher income year after year (which can create its own tax problems).

    I’ve learned to embrace my role as my own boss, set boundaries, and charge what I’m worth—well, that last one’s a work in progress.

    I hope others in similar positions can take solace in my successes as well as my mistakes. Whether you’re just starting out on your own or have been running a business for years, there’s always more to learn and more room to improve. However you define yourself—freelancer, side hustler, business owner, entrepreneur—you are the one in control of your destiny. You are the boss. Hold yourself to a high standard, take pride in your work, and don’t wait for anyone to show you the way. You’ll need to find the way for yourself.

    And for God’s sake, pay your quarterly taxes.

    Looking for tips on minimizing your taxes? Check out our Cheat Sheet: 18 Side Hustle Business Expenses You Can Deduct.

    I can’t be alone.

    Do you have a tax horror story you don’t mind sharing in the comments? Please do, so I don’t feel like the only one who struggled with this.

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    Matt Lurie

    6 posts