Freelanced Too Hard and Got Hit With a Big Tax Bill? How To Handle It, According to a Pro

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7 hours ago

Question #14 of GOBankingRates' Top 100 Money Experts Series
How does freelancing or gig work affect your taxes?
The gig economy has exploded over the past decade, with millions of Americans earning income from freelancing, rideshare driving, food delivery and countless other side hustles. But while that extra income feels great hitting your bank account, many gig workers get a rude awakening come tax season.
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Shang Saavedra, founder of Save My Cents and a nationally recognized personal finance expert, has seen this story play out countless times. After helping people navigate financial challenges for more than 19 years, she knows exactly why freelancers and gig workers often face shocking tax bills. But more importantly, she knows how to avoid them.
'If you're self-employed, get ahead of taxes — work with a great CPA and make sure you're taking every qualified deduction available,' Saavedra said. Here's her expert guidance on handling taxes when you're earning income outside the traditional W-2 system.
The Hidden Tax That Catches Everyone Off Guard
When asked why so many freelancers end up shocked by their tax bill, Saavedra points to a tax that most people have never heard of: self-employment tax.
'When switching from W-2 to freelancer, there's one extra tax you may not be aware of — self-employment tax,' she explained. 'When you were W-2, your employer paid that tax, which is their half of your Social Security and Medicare taxes. But when you're self-employed, you pay both your portion and your self-employed version.'
It's true: While W-2 employees split their Social Security and Medicare contributions 50/50 with their employer, self-employed individuals pay the full 15.3% themselves. On top of regular income taxes, this additional burden can turn a profitable side hustle into a financial headache quickly.
For example, if you earned $10,000 from freelancing, you're looking at roughly $1,530 in self-employment tax alone, before even calculating your regular income tax obligations. Many gig workers discover this only when filing their returns, leaving them scrambling to cover unexpected bills.
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The Psychology Behind the Shock
The tax shock goes beyond just the numbers. In fact, it's psychological. When you're used to receiving a W-2 paycheck with taxes automatically deducted, seeing your full gig income hit your account can create a false sense of wealth.
'You're typically considered self-employed, so you have to actively set aside taxes as you make your income; it's no longer going to be automatically deducted from your paychecks,' Saavedra explained.
This shift from automatic tax withholding to manual tax planning requires a complete mindset change. Instead of thinking about your gross freelance income as 'your money,' you need to immediately set aside 25% to 30% for tax obligations. That $5,000 month from your side hustle isn't really $5,000 — it's closer to $3,500 after taxes.
Planning Ahead: The Smart Freelancer's Strategy
Saavedra's approach to tax planning for freelancers focuses on being proactive rather than reactive. Her strategy involves two key components: professional guidance and quarterly payments.
'Get ahead of it by working with a great CPA to ensure that you are also taking as many qualified deductions as possible by being self-employed,' she recommended. 'There are so many options out there for you to lower your taxable income. Have them help you estimate your taxes so you can pay them quarterly.'
Working with a CPA isn't just about filing your annual return; it's about creating a year-round tax strategy. A good accountant can help you identify deductions you might miss, such as home office expenses, internet and phone use, business insurance, and professional development or training costs.
The quarterly payment system is equally important. Instead of facing one massive tax bill in April, spreading payments across four quarters means tax obligations are more manageable — and helps avoid IRS penalties.
Systems and Tools That Actually Work
When it comes to practical tools for managing taxes as a gig worker, Saavedra keeps it simple but effective.
'I use Gusto to run payroll for myself,' she shared. Treating yourself like an employee of your own business helps automate tax withholdings and ensures you're consistently setting money aside. This habit is key to staying organized — and sane — during tax season.
Beyond payroll systems, successful gig workers typically use separate business bank accounts, expense-tracking apps and automatic savings transfers to a dedicated tax savings account (again, aiming for 25% to 30% of your income). Having these things in place will help make tax season more bearable.
Avoiding the Penalty Trap
Beyond the shock of owing taxes, many gig workers get hit with penalties for underpayment. The IRS expects you to pay taxes throughout the year, not just at filing time. If you owe more than $1,000 when you file, you might face penalties unless you've made timely quarterly estimated payments.
Saavedra's quarterly payment strategy helps avoid this trap entirely. By estimating your annual tax liability and dividing it into four payments, you stay current with your obligations and avoid surprise penalties.
The Deduction Advantage
One silver lining of gig work taxation is the expanded deduction opportunities. Unlike W-2 employees who typically take the standard deduction, self-employed individuals can often deduct business-related expenses to significantly reduce their taxable income.
Common deductions that gig workers often miss include health insurance premiums (if you're self-employed and pay your own), retirement account contributions and expenses related to your business. (That could mean a car if you drive for rideshare apps, or office equipment if you work from home.)
The key here is documentation. Keep receipts, track mileage, log expenses and maintain clear records. When in doubt, ask your CPA whether an expense qualifies as a business deduction.
This article is part of GOBankingRates' Top 100 Money Experts series, where we spotlight expert answers to the biggest financial questions Americans are asking. Got a question of your own? You could win $500 just for asking — learn more at GOBankingRates.com.
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This article originally appeared on GOBankingRates.com: Freelanced Too Hard and Got Hit With a Big Tax Bill? How To Handle It, According to a Pro