18. stop tipping the IRS
whether you have a W2, a 1099, or both— here's what you actually need to know about filing taxes.
Let’s talk about the thing everyone has to deal with and almost nobody actually understands: taxes.
Every year, millions of people file their taxes the same way they always have — either blindly clicking through TurboTax (or H&R Block) or handing everything to a professional and hoping for the best — without actually understanding what’s happening or whether they’re doing it in the most financially intelligent way possible.
And if you’re one of the many people who has a 9-5 and a side hustle— a freelance gig, a small business, a Substack, a consulting client— your tax situation is more layered than most. Which means the cost of not understanding it is much higher too.
Please note: I am not a tax professional so this is purely for informational and opinion purposes. :)
first things first: W2 vs. 1099 — what’s the difference?
The form you receive tells you a lot about your tax situation before you’ve filled out a single line.
the W2 — your employee form
If you have a traditional employer, you receive a W2 every January. This form shows your total wages for the year and — crucially — how much was already withheld for federal income tax, state income tax, Social Security, and Medicare. Your employer has been quietly taking a portion of every paycheck and sending it to the IRS on your behalf all year long.
When you file your return, you’re essentially reconciling: did your employer withhold too much, just right, or not enough? If they withheld too much, you get a refund. If not enough, you owe the difference.
A quick note on refunds: a large tax refund is not free money and it is not a win. It means you overpaid the government throughout the year and gave them an interest-free loan of your own money. Ideally, you want to break as close to even as possible — or owe a small, manageable amount. That means your money stayed in your pocket all year, earning interest in your HYSA instead of sitting with the IRS.
The 1099 — Your Self-Employment / Contractor Form
If you have freelance clients, run a side business, do contract work, or receive income from platforms like Substack, Etsy, or Upwork, you’ll receive a 1099 (usually a 1099-NEC for non-employee compensation, or a 1099-K for payment platforms). Unlike a W2, nothing has been withheld from this income. You received the full amount — and now you owe taxes on all of it.
This is where a lot of first-time side hustlers get caught off guard. They made $8,000 freelancing, spent it, and then get to tax season and realize they owe the IRS a significant chunk of it. As a self-employed person, you’re responsible for both the employee and employer portions of Social Security and Medicare — that’s a 15.3% self-employment tax on top of your regular income tax rate. It adds up fast.
The general rule of thumb: set aside 25–30% of every dollar of self-employment income the moment it hits your account. Put it in a separate savings account and don’t touch it. That is your tax money. It was never really yours to spend.
If You Have Both — The W2 and the 1099
Welcome to the most common situation nobody prepares you for. Your W2 income has taxes withheld automatically. Your 1099 income does not. Which means at tax time, your side hustle income is piled on top of your salary — pushing you into a potentially higher tax bracket and creating a bill you may not have seen coming.
The solution isn’t to panic — it’s to plan. And we’ll get to exactly how to do that.
understanding tax brackets — you are not taxed at one flat rate
One of the most persistent tax myths is that if you get a raise that bumps you into a higher tax bracket, you’ll somehow take home less money. That is not how it works — and understanding this will immediately make taxes feel less scary.
The U.S. uses a progressive tax system. That means different portions of your income are taxed at different rates — and you only pay the higher rate on the dollars that fall within that bracket, not on your entire income.
Here are the 2025 federal income tax brackets for single filers:
10% — on income from $0 to $11,925
12% — on income from $11,926 to $48,475
22% — on income from $48,476 to $103,350
24% — on income from $103,351 to $197,300
32% — on income from $197,301 to $250,525
35% — on income from $250,526 to $626,350
37% — on income over $626,350
So if you earn $60,000, you are not paying 22% on all of it. You pay 10% on the first $11,925, 12% on the next chunk, and 22% only on the income above $48,475. Your effective tax rate — what you actually pay overall — is significantly lower than your bracket suggests.
deductions vs. credits — they are not the same thing
This is one of the most important distinctions in all of tax literacy — and one that most people blur together.
A tax deduction reduces your taxable income. If you’re in the 22% bracket and you claim a $1,000 deduction, you save $220 in taxes (22% of $1,000). It lowers the amount of income the IRS is allowed to tax.
A tax credit reduces your actual tax bill dollar for dollar. A $1,000 tax credit saves you exactly $1,000 in taxes — regardless of your bracket. Credits are almost always more valuable than deductions of the same amount.
Some credits are also refundable — meaning if the credit is larger than your tax bill, you get the difference back as a refund. The Earned Income Tax Credit (EITC) and Child Tax Credit are common examples.
When you’re filing, always look for credits first. They’re the bigger win.
Standard Deduction vs. Itemizing
When it comes to deductions, you have two options: take the standard deduction (a flat amount the IRS lets everyone deduct, no receipts required) or itemize your deductions (list every qualifying expense individually and deduct the total).
For 2025, the standard deduction is $15,000 for single filers and $30,000 for married filing jointly. The majority of people take the standard deduction because their itemized total doesn’t exceed it. But if you own a home, have significant medical expenses, made large charitable donations, or have hefty state and local taxes — it’s worth running both numbers.
deductions people miss — especially with a side hustle
This is where the money is — and where most people leave it on the table. If you have any form of self-employment income, you are entitled to deduct legitimate business expenses from that income before it’s taxed. That means your taxable self-employment income is lower, your tax bill is lower, and you keep more of what you earned.
Here are the ones most commonly missed:
Home office deduction. If you use a dedicated part of your home regularly and exclusively for your business, you can deduct a portion of your rent or mortgage, utilities, and internet. The simplified method lets you deduct $5 per square foot of your home office space (up to 300 sq ft). Keep it clean and documented — this one gets scrutiny.
Mileage. If you drive for your business — client meetings, picking up supplies, going to a co-working space — you can deduct those miles. The 2025 standard mileage rate is 70 cents per mile. Track every business mile with an app like MileIQ or just a simple spreadsheet. It adds up faster than you think.
Software, subscriptions, and tools. Canva, Adobe, your email marketing platform, your website hosting, your project management tool, your Substack subscription fees — if it’s used for your business, it’s deductible. Keep a running list.
Phone and internet. You can deduct the business-use portion of your phone and internet bill. If you use your phone 60% for business, you can deduct 60% of the bill.
Education and professional development. Courses, books, workshops, and coaching directly related to your business or current profession are deductible. That business book you bought, that online course you took to sharpen your skills — keep the receipts.
Health insurance premiums. If you’re self-employed and not eligible for coverage through a spouse’s employer plan, you may be able to deduct 100% of your health insurance premiums. This is a significant one.
Self-employed retirement contributions. Contributions to a SEP-IRA or Solo 401(k) as a self-employed person are tax-deductible and can be substantial. A SEP-IRA allows you to contribute up to 25% of your net self-employment income, up to $70,000 for 2025. This is one of the most powerful tax reduction tools available to anyone with side hustle income.
The golden rule: keep receipts and records for everything. A simple folder in Google Drive, a dedicated business credit card that tracks your spending automatically, or an app like QuickBooks Self-Employed or Wave can make this nearly painless.
how to avoid a surprise tax bill — withholding and estimated taxes
The IRS operates on a pay-as-you-go system. Your W2 employer handles this for you automatically through withholding. But your 1099 income? That’s on you — and if you don’t plan for it, you’ll feel it hard in April.
Quarterly Estimated Taxes
If you expect to owe $1,000 or more in taxes from self-employment income, the IRS expects you to pay estimated taxes four times a year — not just at filing time. The 2025 estimated tax due dates are:
Q1: April 15, 2025 (income earned January 1 – March 31)
Q2: June 16, 2025 (income earned April 1 – May 31)
Q3: September 15, 2025 (income earned June 1 – August 31)
Q4: January 15, 2026 (income earned September 1 – December 31)
Missing these payments doesn’t just mean a bigger bill in April — it can also mean an underpayment penalty on top of what you owe. To avoid both, set that 25–30% aside every time you get paid from your side hustle, and send your estimated payments on schedule via IRS Direct Pay (irs.gov/payments) — it’s free and takes about five minutes.
Adjusting Your W2 Withholding
Another option if you have both W2 and 1099 income: ask your employer to withhold extra from your W2 paycheck to cover what your side hustle income will owe. You do this by submitting a new W4 form to your HR department and specifying an additional dollar amount to withhold each pay period. It’s a quieter, more automatic way to stay ahead of the bill.
what to do if you can’t afford to pay what you owe
First: do not panic, and do not skip filing. These are two very different things.
The penalty for not filing is significantly worse than the penalty for filing but not being able to pay. If you can’t pay in full, file your return anyway by the deadline (or request a 6-month extension — but note that an extension to file is not an extension to pay). Then choose one of these options:
IRS Installment Agreement (Payment Plan). You can apply online at irs.gov to pay what you owe over time — sometimes up to 72 months. Interest and fees apply, but it’s manageable. If you owe $50,000 or less in combined taxes, penalties, and interest, you can typically get approved quickly online.
Offer in Compromise. If you genuinely cannot pay your full tax debt and meet specific financial criteria, you may be able to settle with the IRS for less than you owe. This is a more complex process and is best navigated with a tax professional.
Currently Not Collectible (CNC) Status. If paying your tax debt would prevent you from covering basic living expenses, you can request that the IRS temporarily delay collection. It doesn’t make the debt disappear, but it pauses the clock while you get stable.
The IRS is not as merciless as its reputation suggests — especially if you communicate proactively and don’t ignore the problem. The worst thing you can do is nothing.
tools worth knowing about
IRS Free File. If your adjusted gross income is $84,000 or below, you can file your federal return for free through the IRS Free File program at irs.gov/freefile. There is no reason to pay a filing fee if you qualify.
IRS Direct Pay. Pay your estimated taxes or your balance due directly at irs.gov/payments. Free, fast, and you get instant confirmation.
QuickBooks Self-Employed or Wave. If you have a side hustle, these tools track income and expenses automatically, categorize deductions, and can calculate your estimated quarterly taxes. Worth every penny — and the subscription is itself a deductible business expense.
A CPA or Enrolled Agent. If you have both W2 and 1099 income, own a business, have investments, or just feel like you’re missing something — work with a professional. The cost of a good CPA is almost always less than what they save you. And that cost is also a deductible business expense.
the bottom line
Taxes are not the enemy. Ignorance of financial literacy is. Every dollar you overpay, every deduction you miss, every estimated payment you skip — that’s real money leaving your life unnecessarily. And the people who build real wealth aren’t just earning more than everyone else. They understand where their money goes, including to the government — and they make sure it’s not a dollar more than it has to be.
You now know more about taxes than most people around you. Use it and educate your community.
Resources (for those interested!)
This is SO useful! I am restacking.
Thank you for this!