While side gigs are awesome because they bring in extra cash, making more money also means paying more taxes, which can undercut the additional income you’re counting on.
That is unless you know how to utilize tax deductions, tax-deferred accounts and other tips to reduce the amount of taxes.
Maximize Your Deductions
Here are some ways to get those deductions maxed out.
An unusual deduction that not many people know about, according to Bill Hughes, CPA and certified valuation analyst (CVA) with Business Allies Group, is a promotional deduction for advertising or marketing dollars spent on a charity that has promoted your business or side gig.
“If the organization is using your name in their promotion of the event or your business is getting promoted by your support, then you can claim that as advertising or marketing and it’s fully deductible,” Hughes explained.
Home Office Costs and Related Fees
If you have a dedicated space in which you work at your side gig out of, you can claim the percentage of that space compared to the square footage of your home, Hughes said.
“It allows you to write off mortgage interest or rent, homeowners’ insurance, real estate taxes…security, pest control, and any repairs or maintenance to the home.”
If you have clients to your home office, you can even claim things like landscaping expenses for the upkeep of the outside of the house, he said, or related HOA fees.
Deduct Business Use of a Car and Mileage
While many people know you can write off mileage for business-related driving, Hughes said people don’t always realize that things like driving to the post office, and even driving to the gas station to fuel your car, can count as business miles. In 2024, mileage is reimbursed at 67 cents per mile, he said.
“If you use that car more than 50% for business, then you can actually claim depreciation, loan interest repairs, maintenance, oil changes, car details, that thing, and whatever your business percentage use is.”
If your side gig requires you to have a professional license or registration, you can write off the setup and renewal fees for these.
You also may be able to write off credit card interest, legal and accounting fees, so check with a tax professional in your area, Hughes said.
Health insurance is also another deduction you can take if you don’t get health insurance through your employer and can afford to buy it through your side gig, Hughes said.
Take the Qualified Business Income Deduction
The 2017 Tax Cuts and Jobs Act came with a potentially massive tax break on side gig income, according to Jason R. Escamilla, CFA, founder and CIO of ImpactAdvisor LLC.
Section 199A, qualified business income (QBI), offers a deduction of 20% off taxable income for eligible self-employed and small-business owners, he explained.
“Taxable income must be under $191,950/383,900 [single/married] or $182,100/$364,200 before complicated rules apply.”
Consider Family Income Shifting
If your side gig is or could be a family affair, consider legitimately employing your spouse or children to shift income into their lower tax brackets, according to Alana Gibson, COO of DGR Legal, a legal services firm.
“This strategy must comply with labor laws and fair market pay for the work performed but can effectively manage overall tax liability.”
Hughes added, “As long as your children are under 18 years old, if you pay them, and give them a W-2, you don’t have to take out any federal taxes as long as their pay stays under around $13,000. You also don’t have to hold any federal taxes out and then you don’t have to withhold Medicare and Social Security.”
This could save you almost $2,000 in self-employment tax, Hughes said.
Contribute To Retirement Plans
Contributing to a retirement plan is one of the best ways to lower your taxable income without reducing the actual money you earn. In fact, by working a side gig, you may be able to completely eliminate the amount of your taxable income, depending on the type of plan you use.
The reason: As a side gig worker, you are technically running your own business. If you set it up correctly, you can open a retirement plan that applies only to self-employed individuals, such as a SEP-IRA or a solo 401(k). Both of these plans offer you the opportunity to contribute as much as 100% of your earned income from that side gig into the plan, thereby reducing your taxable income for that work to zero as well.
Backdoor Roth Deferral
If you have medium-to-long-term savings in outside retirement accounts, consider using your side gig income to get those savings to generate more tax-free growth through a solo 401(k) account, Escamilla said.
“We call it the Mega Backdoor Roth. You could potentially ‘move’ an extra $50,000 to $70,000 per year this way. When money is converted into your Roth IRA this way, you only need to leave it in for five years to avoid early withdrawal penalties on the conversion. So as the years go by, any savings from five years before can be treated like your emergency fund, accessible anytime.”
This backdoor Roth strategy can still apply to 2023 income if you open and fund it by the April 15 due date, he said.
Think about these factors before filing.
Make Sure You’re Showing a Profit
Before you start looking for maximum deductions to take, be sure you’re showing a profit, Hughes said.
“I would say if you don’t report at least one or two years of net income, less expenses out of five, then the IRS is probably going to say this is more of a hobby and not a business.”
Keep Records and Receipts
Most importantly, be sure you keep good records and receipts, Hughes said.
“The IRS won’t take canceled checks and credit card statements,” he said. “And we always advise everyone to keep separate accounts for their personal and their business because you also can get the IRS a little angry if you intertwine personal and business expenses.”
Jordan Rosenfeld contributed to the writing of this article.
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