How to Turn Your Side Hustle Into a Massive Tax Deduction

How to Turn Your Side Hustle Into a Massive Tax Deduction

If you took on a side hustle last year to make ends meet and earn some extra cash, you may have found an unexpected surprise when you filed your taxes. If you did not prepare carefully, you probably ended up with a big tax bill for your troubles, possibly with penalties and interest added on.

Given the unpleasant surprises of the past, you may be resigned to a life of higher taxes, all courtesy of the very side hustle you thought would help you gain financial freedom. But before you put away your driving gloves and give up on ride-sharing and grocery delivery, you might want to take a second look at your situation.

With the right planning and preparation, your side hustle could actually lower your tax bill, giving you an even bigger reason to keep driving, door dashing, and doing whatever it takes to make ends meet. Here are some key ways to make your side hustle pay off come tax time.

Note: If you fall behind on filing your taxes or owe back taxes to the IRS, you’re not alone and we can help. Reach out to our tax resolution firm and we’ll help you file late tax returns and negotiate with the IRS if you owe back taxes.

Start By Estimating What You Expect to Earn

It can be difficult to estimate how much you might earn from your side hustle, especially if the time you devote to it and the amount you make varies week to week. Even so, it is important to estimate your income, not only to plan for your deductions but to make advance tax payments as well.

If you expect to earn more than $1,000 from your side hustle, you should strongly consider making quarterly tax payments to the IRS. If you fail to pay ahead, you could end up with a tax penalty when you file, and possibly interest and other charges as well. If you end up overpaying what you owe, you will receive a refund when you file your taxes.

You can start estimating your earnings by looking at how much you made last year. To fine-tune the figure, even more, you can look at your monthly earnings to date and annualize that figure to determine how much you could earn for the entire year.

Consider a Health Savings Account

If you have a health savings account, either through your employer or purchased on your own, you may be eligible for a health savings account, and opening one could significantly reduce your taxable income, so you can keep more of your side hustle money.

In addition to the tax savings, a health savings account can help you pay for medical expenses, both expected ones, and costs that would otherwise have drained your emergency fund. Since the money, you put into an HSA is fully tax-deductible, this simple step can lower your tax bill quite a bit.

Open a Self-Employed Retirement Plan

If you have a side hustle, even on a part-time basis, you are considered self-employed, and that means you can open a retirement plan designed for self-employed individuals. The type of account you can open, and the amount you can contribute, will be dictated by the type of business structure and your earnings, but many of these retirement plans are quite generous in their contribution limits.

If your side hustle is truly a sideline and you have a full-time job with a traditional 401(k) plan, you may be eligible for a SEP-IRA, a unique form of account designed specifically for small business owners and the self-employed. If your side hustle has gone full time, you may want to look at a solo 401(k), a retirement plan that offers high contribution limits and an enormous potential for tax savings. You will need to apply for an employer identification number (EIN) to open this type of 401(k), but you can get that number free from the IRS.

Take Advantage of Your Deductions

Having a side hustle gives you a chance to tax advantage of certain deductions, and using those deductions could significantly reduce your taxable income and boost the size of your refund.

If you run a business out of your home, for instance, you may be eligible for the home office deduction, and that will entitle you to write off part of your mortgage, utilities, and other costs. You can also take a standard home-office deduction based on the square footage of your dedicated workspace and the size of your home.

In addition to those deductions, you may be able to write off things like office supplies, the cost of internet access and phone service, and automotive expenses if you use your car as part of your side hustle or full-time business. You should always check with a tax expert before claiming these deductions, as every individual situation is unique.

Side hustles are becoming more common, and that is good news for many wallets. But when tax time rolls around, those partially self-employed individuals will need to do some serious planning to keep their bills in check, including following the steps outlined above.

Life as a freelancer or gig worker can be wonderful, but it’s not uncommon to see self-employed taxpayers land in trouble with the IRS and owing back taxes.

If you do run into tax trouble, reach out to our tax resolution firm and we’ll schedule a free, no-obligation confidential consultation to explain your options in full to permanently resolve your tax problem. 


5 Things That Can Unexpectedly Raise Your Taxes

Proper tax planning is a year-round proposition. You cannot afford to wait until April to start planning your taxes and assessing your tax liability.

Knowing which factors can raise your taxes is one of the best ways to keep more money in your pocket. These five factors can unexpectedly raise your taxes owed at the end of the year.

Note: If you owe back taxes, our firm can help negotiate with the IRS and potentially settle your tax debt. Call us today. Our tax resolution specialists can navigate the IRS maze so that you have nothing to worry about.

#1 - Cashing in Your Retirement Plan

There are many reasons not to cash in your retirement plan early, but the tax penalty is one of the biggest ones. If you take the proceeds from your 401(k) plan in cash instead of rolling it over into an IRA, you will have to pay taxes on the money you withdraw. Even worse, you will be subject to a 10 percent penalty. By the time you are done, you could lose up to half your hard-earned retirement plan to taxes and penalties.

#2 - Working as a Freelancer

Working for yourself is great, but it can trigger a tax nightmare. Freelancers and other self-employed workers are subject to the self-employment tax, which represents the combined employer and employee share of the Medicare and Social Security tax. That tax hit can be substantial, especially if you plan to fail for it and set money aside.

#3 - Failing to Take Your RMD

You cannot keep retirement funds in your account indefinitely. You are required to start pulling money from your IRA and workplace retirement plans when you turn 70. If you fail to make that required minimum distribution (RMD), you could face a hefty tax penalty. The penalty for failing to take the RMD can be substantial.

#4 - Skipping Your IRA Contribution

If you are used to making an annual IRA contribution, skipping that contribution could cost you money. Before you skip your IRA contribution, take the time to run the numbers and see how the decision will affect your tax bill.

#5 - Paying Off the Mortgage

Paying off the house can be very freeing, but it can also raise your taxes. Mortgage interest is deductible if you itemize your deductions, and losing that deduction could leave you owing more to the IRS. That may not be a reason to keep a mortgage, but it can be an important consideration.

Owe Back Taxes?

If you know you’ll have outstanding tax debt and owe more than $10k to the IRS or state but can’t pay in full, contact our firm today. We help people find tax relief and sometimes settle their tax debt for a fraction of what’s owed.