Whether you have a side-hustle that’s starting to bring in significant income or are launching a brand new venture, you may be feeling concerned about the mounting costs of operating a business. Fortunately, we have good news for you and your bank account: these costs are actually tax deductions that will reduce your overall taxable income for the year. As long as you’re keeping track of your spending and using a separate bank account for the business, you’re already on the way to seeing the benefits of that spending at tax time.
The fourth quarter of the year is an ideal time to get organized for taxes because you can still make a positive impact on your tax burden for the year. As you look through all that you’ve earned and all that you’ve spent, keep an eye out for these potentially lucrative side hustle tax deductions. Download our free comprehensive guide to small business tax deductions full of tips, and strategies.
Any business will incur various communication expenses, including phone, video conferencing, and internet. If you’re running a side hustle, chances are you’re using the same devices and connections you use in your personal life. The important thing to know here is that you can only deduct the percentage of the monthly bill that equals your business usage. So, for example, if you use your home internet for business 50% of the time, you can count 50% of the total bill as a business expense. Same goes for your cell phone. On the other hand, if you have a paid subscription to a service that is purely for business, you can deduct 100% of the cost—for example, your Zoom account, business email, Calendly, etc.
2. Home office
If your business is run from a home office, you will be eligible for a variety of home office expense deductions. These can include mortgage payments, insurance, utilities, repairs and maintenance, and depreciation. The amount you can deduct depends on the business type—are you running an ecommerce business that maintains inventory? Or is is it a service-based business that’s primarily done from your computer? Before you take the home office deduction for the first time, it’s a good idea to consult with a CPA to ensure you’re using it properly.
In order for your home office to qualify, it must be solely used for business. If your home office is your dining room table, where you also eat dinner or hold family game night, that will not qualify. You must have a dedicated space that is reserved for exclusive business use.
3. Freelancers, subcontractors, and professional services
When a side hustle begins to take center stage, you may consider bringing on extra help to increase your capacity. However, you may also use contractors for one-off projects, such as building your website, designing a logo, shooting professional photos of products, keeping up with your books, etc. These costs are all deductions, and also bring up an additional responsibility—you’ll need to send 1099s to these professionals if you pay them more than $600 in a calendar year.
Professional services fall into a similar category. If you’re using the services of a CPA, bookkeeper, attorney, business coach, consultant, or the like, you can deduct the costs associated with their services. In many cases, the amount of money you can save by working with a professional on your taxes, legal agreements, and other specialized areas can far outstrip your initial investment.
4. Office supplies
Pens, paper, stamps—even the smallest of office supplies can add up over time. If you’re not deducting office supplies, you could be missing out on a sizable deduction. Consider using a cloud-based accounting app to help keep track of every expense, which can easily automate the process of categorizing all of your business expenses and reduce manual entry. Bonus—business software, such as cloud-based accounting apps, is yet another category of deductible expenses.
5. Financial fees and interest
Newer business owners are often surprised by the costs associated with borrowing and moving money around. If you take out a business loan, any interest you pay will be deducted in the year you pay it. Also consider any bank fees, credit cards with an annual fee, etc.
6. Advertising and marketing
From social media, digital, and print ads to email marketing and apps that help you manage it all, marketing and advertising costs are a significant source of tax deductions for any business. You can also include membership fees paid for online platforms.
Our internet age has opened up an entire new world of opportunities for online businesses. If you’re in that category, don’t forget all of the costs associated with building, maintaining, hosting, and securing your website. You might work with a web developer, graphic designer, content writer, SEO specialist—and, you guessed it, all of those costs get deducted against your income. Also keep track of subscriptions, plugins, domain names, and hosting services that you pay for on a recurring basis.
8. Shipping costs and packaging materials
Shipping costs and packaging materials will add up very quickly for ecommerce businesses. Everything from actual shipping and postage costs to bubble wrap, tape, boxes, envelopes, and subscriptions related to shipping can be deducted. If you’re driving to the post office or hand-delivering your products, keep track of those trips as they count toward a business mileage deduction. Every little expense can really add up towards your side hustle tax deductions.
9. Merchant processing and credit card fees
No matter what method of payment you accept online, there will be fees associated with accepting and processing payments. Services like PayPal, Stripe, and Square (to name a few) all have fees associated with accepting payments, along with the fees from the credit card companies themselves. It’s a good idea to consider these fees when pricing your products or services, but these fees are also deductible come tax time.
Staying on top of developments in your field will help you with your long-term business strategy. Whether it’s directly related to your trade or an online course to teach you other essentials to running a business, education expenses are deductible as long as they’re related to your business.
At the end of the day, it’s always important to consult with an experienced CPA for tax planning, regardless of the size of your business or side hustle. The tax landscape for anyone doing business through online platforms will undergo major changes in 2022 as anyone earning more than $600 through an online platform will receive Form 1099-K, which is also filed with the IRS. Although you’ve always been responsible for reporting that income, the IRS is gaining a much more targeted way to enforce those rules.
Update: Congress has delayed the law requiring e-commerce platforms to report information on workers earning $600 or more, which was a part of The American Rescue Plan Act of 2021. This law has been pushed by one year, meaning platforms such as Airbnb, eBay, and Etsy will rely on the threshold of more than 200 transactions worth an aggregate above $20,000 for 2022 (not $600).
Our experienced CPAs and small business bookkeepers are here to help you navigate the financial side of your business, and work with you to uncover all of your side hustle tax deductions you may be eligible for. Contact us to schedule a consultation today.