Self-Employment & Taxes: Everything You Need to Know

By Chase Howard

Whether you’re running your own business, picking up side gigs, or freelancing on the weekends, self-employment can bring a lot of freedom—but also a lot of tax questions. So let’s break it all down in a way that’s easy to understand.

What Is Self-Employment?

The IRS defines self-employment as any income you earn from personal services that aren’t considered wages.

Here are the three most common types of self-employment:

Business Owners – You run your own business, big or small.
Independent Contractors – You work with other businesses, but not for them. No W-2 here—just 1099s and invoices.
Side Hustlers – Selling crafts on Etsy? Doing photography gigs on weekends? Even if it’s just a few hundred dollars, it counts. And yes, the IRS wants you to report it.

A lot of people assume small amounts don’t need to be reported. They do. But the good news is, there are deductions that can help offset the tax hit—if you know what to track.

What Taxes Do You Owe?

If you’re used to a W-2 job, your taxes are taken out of your paycheck. But when you’re self-employed, you’re on the hook for it all yourself.

You’ll need to account for two types of tax:

1. Income Tax –Everyone pays this. It’s based on your total taxable income for the year, minus deductions. Most people pay somewhere between 0% and 22%, but it can go as high as 37%.

2. Self-Employment Tax–Here’s the kicker: When you’re self-employed, you pay 15.3% to cover Social Security and Medicare. Normally, your employer would pay half—but now it’s all on you.

Important distinction:

You pay income tax on all income (W-2 and self-employment).
You pay self-employment tax only on your business income.

So if you work a W-2 job and run a side hustle? You’ll owe income tax on both—but self-employment tax only on the side hustle.

Why Bother With Self-Employment?

You might be wondering—why run a business if it means more taxes?

Because you get deductions that W-2 employees don’t. As a business owner, every legitimate business expense is a potential tax deduction.

So your taxable income =
Gross income – Expenses

What Expenses Can You Deduct?

Short answer? Everything related to the business.
Just make sure you track it well and keep receipts. Whether you use a spreadsheet or accounting software like QuickBooks, having a record is crucial if the IRS ever comes knocking.

Here are the top 3 most misunderstood deductions:

1. Mileage

If you use a car for work, you can deduct either:

Actual vehicle expenses (gas, repairs, etc.)
Or take the standard mileage rate (last year, it was 67 cents per mile)

Track both throughout the year to see which gives you the bigger tax break.

2. Home Office

To qualify, you need a dedicated space used exclusively for your business. You can either:

Deduct $5 per square foot
Or calculate actual costs (utilities, mortgage interest, etc.) based on the percentage of your home used for work

3. Meals

Only deductible if: you’re traveling for business, or meeting clients or prospects
In either case, you can deduct 50% of the cost.

Here’s a quick list of things you might be able to deduct:

Supplies and equipment
Travel (hotels, airfare)
Health insurance
Business insurance
Training or licensing costs
Advertising and marketing
Legal and professional services

How to Get Ready for Tax Time

Let’s talk prep.

The #1 thing you can do to make tax season painless? Keep good records.

If you’re not super organized—don’t worry. As long as you have the records, your tax professional can help you pull everything together.

Ideally, you’ll fill out a Profit & Loss (P&L) Statement, which is just a simple summary of your total revenue for the year, and a breakdown of your expenses (travel, marketing, supplies, etc.)

Ask questions at your appointment! At Pack Tax, our goal is to help you understand what’s going on—not just plug in numbers.

A Word on Estimated Taxes

When you’re self-employed, the IRS doesn’t want you to wait until April. They expect quarterly payments.

To avoid penalties, divide your expected tax bill by 4 and pay that amount every quarter. That way, tax season won’t sneak up on you with a big surprise.

Final Thoughts

Self-employment can be exciting, empowering—and yes, a bit complex when it comes to taxes. But it doesn’t have to be overwhelming.

At Pack Tax, we’re here to walk you through the process, answer your questions, and make sure you’re maximizing your deductions while staying compliant.

Have questions about your business or side hustle taxes?

Give us a call—we’d love to help. You can find information for any of our locations at www.pack.tax