Must-Know Tips for Navigating Tax Season With a Side Hustle

This Q&A features Lauren Myrick, founder and CEO of Found. Myrick raised more than $75.2 million from leading VCs including Sequoia Capital, Founders Fund and Lightspeed Venture Partners to build a better banking system for self-employed freelancers and independent workers.

Image credit: Courtesy of Found

What inspired the idea for Found?
I’ve seen the frustrations of small business owners firsthand through my personal and professional life. On a personal note, my sister is a yoga studio owner and self-employed fitness instructor, and I saw her struggles navigating traditional finance and business management tools. Professionally, when I was the GM of Square’s Payroll business, I saw how complicated, painful and stressful taxes can be for small business owners.

Both of these perspectives inspired me to further investigate the financial management and tooling challenges that self-employed business owners face. Connor Dunn, my co-founder, and I started talking to family members, friends and other self-employed business owners to understand their challenges. Many people don’t realize that managing your finances when you’re self-employed differs quite a bit from when you are a W-2 employee. There are different tax requirements and forms, and you are on your own to figure out how much you need to pay in taxes. We also saw a common theme that people start their own businesses because they want freedom, flexibility and creative control — not so they can become their own accountants.

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During these conversations and additional research, we realized two important things. First, we could provide tremendous value to these self-employed individuals by giving them a toolkit to manage their finances — something we felt we were uniquely equipped to do because of our backgrounds at Square. Second, the self-employed population in America is large and growing: Approximately 60 million Americans today are self-employed, and self-employment will soon surpass traditional employment to become the majority of the American workforce. Shortly after these conversations, we started Found.

Why is doing taxes one of the most difficult financial tasks for freelancers?
Unlike W-2 employees, business owners and freelancers do not proactively have income taxes taken out of their paychecks — and are expected to calculate and report their expected taxes themselves throughout the year. They are also frequently acting as their own “finance department,” an area where most have very little expertise. This typically involves keeping business and personal finances separate, correctly calculating and proactively saving the proper amount for taxes, and tracking financial deadlines, expenses and fines.

In addition, tax laws are always changing and complicated by both state and federal policies. These laws are also starting to regulate how payments are invoiced, paid and tracked in relation to apps and platforms that we all interact with. For example, millions of freelancers, gig workers, solopreneurs and contract workers breathed a collective sigh of relief in December 2022 when the IRS delayed the new tax-reporting requirement for third-party payment platforms like Venmo, Cash App and PayPal, but that was just a temporary measure.

Keeping finances organized while also staying on top of these changing laws is a lot to manage, and the tools available to the self-employed are typically expensive and disparate. Because of this, and because there is the ever-looming risk of owing money in taxes at the end of the year, we frequently hear that doing taxes is one of the most stressful parts of being self-employed.

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How does Found’s partnership with Column Tax this year offer a solution for that?
Found directly helps self-employed professionals save for and pay quarterly taxes. Found can automatically estimate and set aside money for taxes for our users based on their income. We can also help our users easily categorize expenses and provide guidance on what can and cannot be deducted as write-offs.

Found partnered with Column Tax to take these benefits a step further and provide tax filing services to its users, particularly those who are Schedule C filers. Column’s tech is integrated into Found’s suite of financial tools for independent workers. With Column Tax, Found Plus subscribers can access free tax filing services as part of their annual subscription.

Filing through Column Tax is already around 1.5-2 times faster than standard DIY tax software providers and can be even faster for certain filers like independent workers who often have more complex tax returns. Because Column Tax is able to pull data directly from Found accounts, this partnership can help save Found users a lot of time when entering financial details during the filing process. The IRS has estimated that self-employed individuals spend 24 hours on taxes per year! And pay $560.

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Do you have any top tips for freelancing and side-hustling filers who want to file with ease?
First, it’s incredibly important to organize your income sources. Keep track of 1099-NEC forms from clients and 1099-K forms from payment processors like PayPal to avoid a last-minute scramble. Second, make sure to separate business and personal finances, ideally through maintaining separate bank accounts, which will help simplify end of year reporting. You also want to meticulously track all business-related expenses, as these could be deductible expenses and significantly lower your taxable income. This could include expenses related to equipment, supplies, home office costs, phone bills and any other materials needed for your business.

Lastly, it’s crucial to understand your responsibility for paying self-employment tax in addition to regular income tax. To ensure you have sufficient funds to cover your tax bill, including estimated tax payments, allocate 20-30% of your freelance income into a separate savings account dedicated solely to taxes. If you expect to owe at least $1,000 in federal taxes for the year, make quarterly estimated tax payments to avoid underpayment penalties. Properly budgeting and making timely tax payments can save you from potential financial headaches down the line.

And what are some of the common mistakes they make during filing, especially around retirement?
When we surveyed Found customers last year, we learned that only 22% of self-employed people know how to maximize potential deductions and write-offs, which means they are missing the chance to lower their taxable income — and therefore their tax bill. Some of the tax deductions, like when you buy a new laptop for your job or pay your CPA, are more straightforward, but there are so many others.

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For example, saving for retirement is something everyone — whether you’re a traditional W-2 employee or full-time freelancer — can be doing for their future. And when you’re self-employed, you can likely deduct contributions made to several types of retirement plans, such as traditional IRAs, SEP IRAs and Solo 401(k)s. Some of these retirement accounts can lower taxable income by deferring the tax bill until the money is withdrawn in retirement. Not being aware of these benefits can lead to missed opportunities for tax savings.