How Side Hustles Can Help You Pay Less in Taxes (and Boost Your Income!)
For many people, tax season can feel like just another unavoidable adult responsibility—something to get through without too much hassle. However, after digging into some research, it becomes clear that there are ways to be more proactive.
In particular, having a side hustle can be a real game-changer when it comes to taxes. It opens up opportunities for deductions, credits, and strategies that can significantly reduce your tax burden.
If you’re working a full-time job and picking up side gigs for extra cash or even thinking about dipping your toes into freelancing, listen up—because your side hustle could help you pay fewer taxes. Yep, you read that right!
Let's talk about how starting a simple side hustle can actually work to your advantage when tax season rolls around and how you can keep more of your hard-earned money.
The Tax Advantages of Being Your Own Boss (Even Part-Time!)
One of the biggest perks of side hustles is that they transform you from an employee to a self-employed individual. This shift opens up a world of tax benefits that you might not have known existed. The IRS sees you as a business owner once you start earning income from a side gig, which is a huge win when it comes to deductions.
More Than Just Extra Cash—You Get Deductions!
When you earn income on the side, you can start deducting business-related expenses. Now, don't be put off by the word “business”—even if you’re walking dogs on the weekend or selling homemade candles online, you’re technically a business in the eyes of the IRS. And as a business, you can deduct certain costs associated with running that business.
Some of the common deductions you might be eligible for include:
- Costs of materials and supplies
- Advertising or marketing expenses (yep, even those Facebook ads count!)
- Software and tools you use to run your business
- Any travel costs related to your gig, like driving to meet clients or pick up supplies
These deductions can add up and directly reduce the amount of income you owe taxes on. Suddenly, those tax bills don’t seem quite as daunting, do they?
Common Side Hustle Tax Deductions (and How to Maximize Them)
Let's break down a few of the most common and lucrative deductions you can claim as a side hustler. Each one of these could save you a chunk of change come tax time.
Home Office Deduction: Make Your Space Work for You
If you work from home, even part of the time, you could qualify for the home office deduction. This deduction allows you to claim a portion of your rent, mortgage, utilities, and even internet costs as business expenses.
Here’s the trick: the space has to be used exclusively for your side hustle. So, if you’re working from your couch and using that same space to watch Netflix at night, it’s not deductible. But if you carve out a little corner of your living room and set it up as your workspace, you’re in business. Even a small space can lead to significant savings. Plus, it's always nice to have a dedicated area to focus on your hustle.
Business Mileage: Get Paid for Driving
For those of us who do a lot of running around for our side gigs—whether it’s meeting clients, delivering products, or even just picking up supplies—the business mileage deduction can be a major money saver.
In 2023, the IRS allows you to deduct 65.5 cents per mile for business travel. If you’re regularly hitting the road for your side hustle, that can add up fast.
- Pro Tip: Keep a log of your trips (I use an app like MileIQ to do it automatically) so you don’t have to try and remember every single trip you made at the end of the year. Trust me, it’ll save you from a serious headache later on!
Deduct Your Equipment and Supplies
Whether you’re a freelancer designing websites, a photographer shooting weekend events, or a crafter selling on Etsy, you’re likely using equipment or materials to get the job done. The good news is that almost anything you purchase for your side hustle could be tax-deductible. This includes:
- Laptops, cameras, or any other tech you need to perform your gig
- Software programs or subscriptions that help you run your business (like Adobe Suite, Canva, or even website hosting)
- Physical materials, such as paint, craft supplies, or packaging materials if you're shipping products
Keeping track of these purchases and saving receipts is essential because it’s all deductible! And again, all these little expenses that seem small at the time can really add up at the end of the year.
Retirement Savings for Side Hustlers: Double the Benefits!
Many people start side hustles to make some extra cash, whether it’s to pay off bills or enjoy occasional splurges. But one of the most overlooked benefits of having a side gig is how it can help build serious wealth for the future. Beyond just increasing your income, a side hustle provides the opportunity to contribute to retirement savings in a more strategic way.
Solo 401(k): Max Out Your Contributions
If you’ve got a side hustle, you’re in a great spot to open a Solo 401(k), which lets you play both the employee and employer roles. According to Investopedia, the employee contribution limit for 2024 is $23,000 ($22,500 for 2023), or $30,000 if you’re over 50. But it gets even better—since you’re also the employer, you can add up to 25% of your side hustle’s net income on top of that.
That’s a massive opportunity to build your retirement savings and lower your taxable income since contributions to retirement accounts are often tax-deductible. The more you contribute, the less income you have to pay taxes on.
SEP IRA: A Simpler Option for Side Hustlers
If the Solo 401(k) sounds too complicated, you can also go with a SEP IRA. It’s super easy to set up, and you can contribute up to 25% of your self-employment earnings, with a maximum limit of $66,000 in 2023. Just like the Solo 401(k), contributions are tax-deductible, so you’re not only saving for the future—you’re saving on taxes right now.
And remember, even if your side hustle is small, every little bit you contribute to retirement helps. You’re setting yourself up for long-term financial stability.
Self-Employment Tax: Understanding What You Owe
Okay, let’s talk about self-employment tax for a second. It’s one of those things that can take you by surprise if you’re new to side hustling. When you’re working for yourself, you’re responsible for both the employer and employee portions of Social Security and Medicare taxes—this is what’s known as self-employment tax.
How Much Is Self-Employment Tax?
Self-employment tax is 15.3% of your net earnings. That can sound like a lot, but there’s some good news. You can actually deduct half of your self-employment tax when calculating your income taxes. It’s one of the perks of wearing both employer and employee hats!
Make sure to set aside part of your income throughout the year to cover these taxes. I usually save around 25-30% of my side hustle income to cover self-employment tax, income tax, and any state taxes I might owe. Trust me, it’s better to save too much than too little!
Quarterly Estimated Taxes: Stay Ahead of the Game
If your side hustle is bringing in consistent income, you may need to start making quarterly estimated tax payments. I know it sounds like a hassle, but it’s easier than it seems. The IRS expects you to pay taxes on your income throughout the year—not just when you file in April.
To avoid penalties, you can estimate your earnings and pay a portion of what you owe four times a year. A lot of side hustlers don’t realize this, and they end up owing more than they planned for when tax season comes around. Setting up automatic payments or reminders can help you stay on top of this.
Tools like QuickBooks or TurboTax have features that help you calculate and make quarterly payments automatically.
Health Insurance: Another Major Tax Write-Off
If you’re paying for your own health insurance, you could be eligible for a health insurance deduction. This is especially helpful for those of us side hustling full-time or freelancing without coverage from a traditional job.
Here’s how it works: if you’re not eligible for health insurance through your primary job or your spouse, you can deduct the premiums you pay for yourself, your spouse, and any dependents. This can help lower your taxable income, which means less of your income gets eaten up by taxes.
Keep Detailed Records: It’s Worth the Effort
I know keeping track of everything can be a drag. But staying organized and keeping detailed records is one of the smartest things you can do as a side hustler. I like to use a combination of apps and good old-fashioned spreadsheets to track:
- Income from all my gigs
- Receipts for every business-related purchase
- Miles driven for work purposes
- Payments made for health insurance, retirement accounts, and taxes
When tax season rolls around, having everything in one place will save you a ton of time and ensure you’re getting every deduction you deserve.
Good record-keeping is the key to maximizing deductions and minimizing stress at tax time.
Wrapping It Up
Side hustles aren’t just about making extra money—they’re about getting ahead financially and giving yourself more control over your future. Sure, they can boost your income, but the tax benefits of running a side gig are where the real magic happens.
Between deductions, retirement savings opportunities, and self-employment tax write-offs, side hustling can help you lower your taxable income and keep more of your money where it belongs—in your bank account.
So, if you’re already side-hustling or thinking about starting, don’t just focus on the extra cash—focus on how you can make the tax system work for you.
