Tax Filing Cheat Sheet: 18 Side Hustle Business Expenses You Can Deduct
Having your own business is awesome, but if you aren't paying attention, your side hustle could end up costing you. With these tips, you can minimize your financial burdens during tax season.
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A side hustle is a great way to generate extra income for your financial independence or early retirement goals. But if you’re not careful, it can also be a great way to get in trouble with the Internal Revenue Service.
Fail to file your taxes correctly and you might end up getting audited, owing thousands (or more) to the IRS, or both. Try to cheat the system and you could face criminal prosecution—and even jail time.
18 ways to save more with your side hustle:
Don’t let your side hustle business turn into a liability during tax time. Smart taxpayers know how to minimize their financial burdens by taking advantage of the various deductions built into the US tax code. Here are 18 expenses every side hustler should consider writing off.*
*This is not intended to be tax advice. Unless you’re a CPA, you should consult with an accountant or financial advisor before trying any of these strategies.
1. Self-employment tax
When you work for an employer, they deduct federal and any applicable state taxes from your paycheck. If you work for yourself—as a freelancer, independent contractor, sole proprietor, or entrepreneur—the IRS considers you self-employed. That means you’re on the hook for income taxes (up to 37% of your income) plus self-employment tax (15.3% of your income). Woof. The good news is that you can deduct half of that 15.3% before calculating your income tax.
2. Startup expenses
Opened a business in the past year? You may be able to write off $5,000 in startup expenses. However, if you want to claim this deduction, your total startup expenses must be under $50,000—any dollar over that amount reduces how much you can claim.
3. Depreciable equipment
If you bought new or used equipment for your business (e.g. a car, truck, computer, printer, furniture, etc.) in the past year, you can write off 100% of the cost through a tax-saving method known as “bonus depreciation.”
In the past, business owners have used depreciation to offset expenses over the course of several years—for instance, you could claim 10% of the cost of a computer bought in 2010 every year through 2020. The recent tax reform law made it possible to claim all of the cost upfront, for big savings in a single year.
The catch is that you only have a couple years left to use this strategy. Starting in 2023, the bonus depreciation limit will come down annually until reaching 20% in 2026. (Note that you can also expense equipment through the Section 179 deduction—more information in item #8 below.)
4. Home office expenses
If you work from home and have a certain room or area that’s for business only, you can deduct all costs associated with that space—mortgage interest, rent, utilities, repairs, maintenance, cleaning, etc. There are a couple ways to figure out this deduction:
- You can calculate your costs, multiply them by the area’s square footage, and subtract that number from the total (your home’s overall square footage times expenses). Or...
- You could use the IRS’s simplified option, which allows you to deduct $5 per square foot of home used for business (for a maximum of 300 square feet).
5. Travel expenses
Travel a lot for work? Write it off! As long as you’re self-employed, you can deduct travel expenses such as airfare, meals, lodging, business calls, and even tips. There are a few caveats, however.
The expenses must be “ordinary and necessary,” the travel has to take you further than your “tax home” (the town or city in which you do business), the trip has to be longer than a day (i.e. you need to stay somewhere overnight), and non-business expenses aren’t deductible. Further restrictions apply to international travel.
If you drive a car, truck, Wienermobile, or another vehicle for business purposes, you can claim a portion of every mile driven as a business expense. In 2020, the rate is 57.5 cents per mile (0.5 cents less than it was in 2019).
7. Office supplies
Paper, pens, sticky notes—the little things can add up when you’re running a business. Fortunately, you can deduct the full cost of office expenses like these as “incidental” materials and supplies.
8. Business software
If you’ve purchased “off-the-shelf” software (meaning it’s available to the public and hasn’t been custom-designed) for your business over the past year, you can claim the full cost of the software through the Section 179 deduction. (Note that Section 179 can also apply to physical business equipment, which means you can use it in tandem with bonus depreciation to really maximize your tax savings.)
Website updates, logo designs, email newsletters, pay-per-click ads, social media marketing, sponsorships, billboards, and television commercials are just a few of the advertising expenses you can fully deduct from your taxes.
10. Business insurance
Yes, you can deduct any premiums you pay for business insurance. These include policies such as general liability insurance, professional liability insurance, commercial property insurance, commercial auto insurance, unemployment insurance, and more.
If you’ve needed to learn a skill or get certified to do your profession, you’re in luck. The IRS allows you to write off work-related education expenses such as tuition, books, supplies, and lab fees. The key term is “work-related.” To be deductible, the education must either “maintain or improve skills needed in your present work” or be required by “to keep your present salary, status, or job.”
12. Business loan interest
A loan is a pain to deal with, but it actually can help you out during tax time. Well, maybe not “help”—but at least you don’t have to pay interest twice. You can deduct interest paid on a business loan as long as that loan is the genuine, “official” kind—e.g. not an agreement to pay back your parents in 5 years.
13. Mortgage interest
Along with business loan interest, mortgage interest is also deductible—and writing it off can make a big dent in your tax liability. However, this deduction isn’t as powerful as it used to be. Under the Tax Cuts and Jobs Act, the most recent tax reform law, taxpayers can only deduct interest on loans valued at up to $750,000. Other caveats apply.
14. Student loan interest
Many of us are saddled with student loans throughout our 20s, 30s, and sometimes far beyond. The IRS has taken pity on us by allowing taxpayers to deduct up to $2,500 in student loan interest paid within a year. Note that this is an “above-the-line” deduction, meaning it applies whether you itemize or take the standard deduction. In other words, if you can take it, you should.
15. Medical expenses
Healthcare is expensive. It can be a little less expensive if you avail yourself of the medical expense deduction. If your total out-of-pocket (i.e. unreimbursed) healthcare costs over a year exceed a certain percentage of your income (7.5% for tax year 2019, and 10% for tax year 2020), you can likely write them off when you file. Most expenses are deductible; exceptions include cosmetic procedures and the costs of over-the-counter drugs other than insulin. Essentially, if you needed it, had to go to a doctor for it, weren’t totally covered for it, and paid a large chunk of your income for it, you can probably write it off.
16. IRA contributions
One of the downsides of self-employment is that you have to manage your retirement savings on your own. However, if you have an individual retirement account (IRA), you can deduct your annual contributions to the account up to a specified limit ($6,000 for tax years 2019 and 2020). Learn how to retire early as a freelancer.
17. HSA contributions
Speaking of deductible contributions to savings accounts, if you’ve established your own health savings account (HSA), you can write off payments made to that as well. The maximum you’re allowed to deduct is $3,500 in tax year 2019, which will increase to $3,550 in tax year 2020.
18. Charitable contributions
Giving back—it’s not only the right thing to do, but a financially savvy move for a taxpayer. Did you know that you can deduct charitable contributions equivalent to up to 60% of your adjusted gross income? That’s a major writeoff—but bear in mind that not every donation is tax-deductible.
Bonus: 7 Tips for First-Time Self-Employed Taxpayers
These are just a few of the potential tax-saving strategies out there for side hustlers. But while each has the potential to reduce your tax burden, not every one may work for you. More importantly, no deduction is a magic bullet. To maximize your savings and file your taxes as cost-effectively as possible, keep these tips in mind:
1. Don’t itemize for the sake of itemizing.
If you’ve kept all your receipts in a neat file folder next to your desk—congratulations, you’re more organized than me. But don’t count on those scraps of paper to help you during tax season. For the vast majority of taxpayers, the standard deduction provides greater savings than itemized deductions could. You need to have spent a lot of money on deductible expenses to exceed the savings available through the standard deduction.
2. Make the most of your above-the-line deductions.
In tax-filing speak, there are two kinds of deductions: above-the-line and below-the-line deductions. The “line” is your adjusted gross income (AGI)—the money that the IRS actually taxes you on. An above-the-line deduction is a powerful tool, as it reduces your AGI, meaning you pay less overall before claiming other deductions. There’s a big above-the-line deduction to be aware of: thanks to the recent tax law, many sole proprietors and people who own pass-through businesses (LLCs, partnerships, and S corporations) can currently reduce their taxable income by 20%.
3. Pay your estimated taxes on time.
The IRS requires self-employed people to pay quarterly estimated taxes. This keeps you from facing an enormous bill in April—a bill that would be made even larger by late fees.
A very simple way to get a rough estimate of your tax liability each quarter is to use a paycheck calculator to see what your paycheck would look like if you were paid by an employer. You’ll see an itemized list of what an employer would deduct for federal and state taxes and can pay that appropriately. This is not perfect but gives you a good idea or starting point.
4. Set aside some money for tax season.
Even if you pay your quarterly taxes on time (and you really should), you might still owe the IRS when it comes time to file. That’s because your estimated payments are based on your previous year’s income. If you made more this year than you did the year before, you’ll probably need to pay the difference—so keep some extra cash on hand just in case. You should also expect to pay at least $100 for filing software or professional tax assistance.
5. Don’t forget about state and local taxes.
Generally speaking, the higher your federal tax payments, the higher your state taxes will be. If you move, you’ll find that some states are cheaper to do business in than others.
6. Consider incorporating.
Switching from a sole proprietorship to an LLC or other business entity can potentially improve your tax situation and reduce your liability. We’ll explore this topic in a future article, so stay tuned to this blog.
7. Ask for help.
Finally, don’t assume you’re equipped to manage your taxes alone. Filing can get complicated and time-consuming for side hustlers. It’s all too easy to make mistakes or lose track of important forms. Think about the value of your time—is spending 10 hours freaking out over your taxes really “cheaper” than paying for professional tax preparation? Is the risk worth it?
Whether you’re filing your taxes for the first or 50th time this season, you’re not alone. Here on Think Save Retire, you’ll find hundreds of articles about saving money, managing a side hustle, and maximizing your wealth. We’re proud to be home to a passionate community of savers, side hustlers, and soon-to-be-early retirees.
What’s your #1 tax saving tip?
Do you have any tax filing horror stories?
Getting a return this year? How do you hope to spend—or save—it?