Did you take on a side hustle to make extra cash? You may have gotten a surprise at tax time! With careful preparation, you can turn your side hustle into a tax deduction. Without it, you could end up with an unexpected tax bill. Or even worse, with penalties and interest adding up.
If you’ve taken on side work like driving for Uber or Lyft, it’s usually because you need a little extra cash. Or maybe you’re making extra money through a craft or skill you enjoy, such as with an Etsy site. Either way, what you don’t want is to pay more than you have to in taxes on your side gig.
You can turn your side hustle into a tax write-off ff you plan and prepare properly. So don’t give up on driving, door dashing, delivering groceries or doing whatever you’re doing to bring home a little extra. Here are some tips to make your side hustle pay off at tax time.
Estimate What You Expect to Earn
With a new side gig, it may be difficult to estimate how much you might earn. However, it’s important to try to estimate your income, so you can plan for tax deductions and make advance tax payments. This will keep you from getting behind and owing a large amount at tax time.
If you think you will earn more than $1,000 this year from your side hustle, you should make quarterly tax payments to the IRS. If you don’t pay ahead, you could end up with a tax penalty for not making quarterly payments when you file. That means you could also end up owing interest and other charges as well. If you overpay in quarterly payments, you will receive that money back in a refund when you file your taxes.
Start estimating your earnings by looking at how much you made last year. Then look at your monthly earnings to date this year and use that to determine how much you could earn for the entire year.
Start a Health Savings Account
If you have health insurance, you may be able to open health savings account (HSA). It’s a good idea to check your eligibility and open this type of saving account if you can. Health savings accounts can significantly reduce your taxable income, so you can keep more of your side hustle money. The money you put into a health savings account is completely tax deductible. That means it can reduce what you owe in taxes by the same amount.
In addition to these potential tax savings, health savings accounts can help you pay for medical expenses. Take advantage of this type of account so you don’t drain your nest egg on medical bills. And get a tax break, too.
Create a Self-Employed Retirement Plan
Even if your side hustle is part-time, you can be considered self-employed. That means you can open a retirement plan for self-employed individuals. These retirement plans can have generous contribution limits, which will help your tax return. Your earnings and the type of business you run will determine what type of account you are eligible to open and the amount you can contribute. This is another great way to turn your side hustle into a tax deduction.
However, if you have a full-time job with a traditional 401(k) plan in addition to your side gig, you may be eligible for a SEP-IRA. A SEP-IRA is an account designed specifically for self-employed individuals and small business owners. When or if your side business becomes full-time, you may want to open a solo 401(k), a retirement plan with high contribution limits. This type of account can also help with saving you money on your tax return. To open this type of account, you will need an employer identification number (EIN), which you can apply for with no cost from the IRS.
Write-offs that Turn Your Side Hustle into a Tax Deduction
Your side gig or freelance work can enable you to take certain tax deductions, and those deductions can reduce your taxable income. Reducing your taxable income can be the key to lowering what you owe and possibly increase the amount of your refund.
For example, if you run your business out of your home, you may be able to take a deduction for your home office. By claiming your home office, you can write off the portion of your mortgage and other expenses such as utilities that pertain to that dedicated portion of your home. You may also be able to deduct other expenses, such as your phone service and internet expenses. You may even be able to deduct mileage and other vehicle-related expenses if you use your car for your side work.
Before you take these deductions, you should consult with a professional tax preparer. Your situation may have certain circumstances that dictate your eligibility for these deductions.
Need Help with Turning Your Side Hustle into a Tax Deduction?
At Tax Resolution Group, our tax resolution specialists can answer your questions. We’ll help you turn your side hustle into a tax deduction – or help you get out of tax debt if you are already there. Tax Resolution Group specializes in fixing tax problems. We offer proactive tax services including tax resolution, tax planning, tax preparation and audit support. We offer in-person, virtual service or socially distanced service, and we are ready to help you. Call us for tax help today at 941-413-2799 or Request a Free Consultation.