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Updated on Tuesday, September 15, 2015
So you’ve stepped up you game and started a side hustle, huh? Good for you! Finding ways to earn more money is one of the best ways to reach your biggest financial goals even faster.
There is one minor annoyance about earning more money, and that’s taxes. The more you earn, the more you’re taxed. And no one likes taxes.
So in this post we’re going to walk through seven ways you can minimize the tax impact of your side hustle, leaving more of that extra money available for things you actually care about.
But before we do that, I want to remind you of one thing: you only owe more taxes because you have more income. And more income is a good thing!
Which is simply to say that while the tips here will be useful, you shouldn’t be afraid of taxes. In fact, you should welcome a bigger tax bill because it means you’re making more money, and you should never make a decision for tax reasons alone.
So keep your focus on building that side business and making more money. Use the tips below only as a way to minimize taxes keep more of that money for yourself.
Quick disclaimer: I am not an accountant. These are things I’ve picked up both from my experience as a financial planner and as a small business owner, but you should always consult with a professional.
1. Work with an Accountant
Yes, working with an accountant will cost you money up front (not tax money though!). Which is why many people avoid it.
But there are two big reasons why an accountant will absolutely save you money over the long-term:
- An accountant will help you avoid mistakes, which will both save you money and save you from being on the IRS’ bad side. And trust me, you really don’t want to be on the IRS’ bad side.
- A good accountant will know exactly how to maximize the tax savings available to you, based on your specific circumstances. You won’t be able to find that personalized expertise anywhere else.
A good accountant is like a good investment. You have to put money in, but you can expect to get much more out.
2. Save for Retirement
Hopefully some of that extra money you’re earning can go towards enjoying life. But there are some pretty sweet tax breaks to be found in saving some of it for the future.
Contributing extra money to a 401(k) or Traditional IRA will provide an immediate tax deduction. Contributing to a Roth IRA won’t save you money today, but later on you’ll be able to withdraw the money tax-free.
There are even a number of dedicated self-employed retirement accounts you could open to save even more.
Increasing your retirement contributions allows you to save for the future and save on taxes today. Pretty sweet deal!
3. Contribute to a Health Savings Account
If you’re eligible for a health savings account, there may not be a better way to minimize your tax bill.
An HSA is one of the only accounts that offers a TRIPLE tax-break. Here’s how it works:
- Contributions are tax-deductible (like a 401(k) or Traditional IRA).
- Money grows tax-free inside the account (like any retirement account).
- Withdrawals are tax-free when used for medical expenses (like a Roth IRA).
HSAs are a great way to get tax-free medical care. And since you can invest within a health savings account just like you would within an IRA, they’re also quite possibly the best retirement account out there.
4. Deduct Business Expenses
As long as you’re really running a business (and not a hobby), any money you spend on the business can be deducted at tax time, which directly lowers your tax bill.
Now, especially when you’re running a side business, it can sometimes be a little unclear which expenses are 100% business (and therefore deductible) and which are at least a little bit personal (and therefore maybe not 100% or even 1% deductible). Here are a few guidelines that will help you keep this line as clear as possible:
- Hire an accountant (see above). They’re the experts who can answer all your specific questions here.
- Have a separate business checking account. Run all business activity through it.
- Have a separate business credit card (not necessary if you’re fine using a debit card).
- Keep receipts for everything. I store mine in Google Drive so they’re easy to access and I don’t have paper everywhere.
- Use some kind of accounting software. Wave is free. Quickbooks Online is not free but is very popular and seems to be known by most accountants. Xero is another one I’ve heard good things about.
Keep in mind that even a deductible expense costs you money. The tax savings means it costs a little less than if it weren’t deductible, but you are never getting anything for free. In other words, spending money just for the tax deduction means you’re losing money.
5. Consider a Home Office Deduction
There are a number of requirements you have to meet in order to claim a home office deduction, including using the space exclusively for business purposes. Any space that mixes in personal use doesn’t count.
But if you can meet those requirements, this can be a pretty valuable deduction, allowing you deduct a percentage of your rent, mortgage, and utility bills as a business expense.
6. Track Internet and Phone Use
If you’re using your personal phone and Internet service for business purposes, you may be able to deduct a portion of those bills as a business expense.
Again, just be sure to keep good records of when you’re using those things for business as opposed to personal reasons. The better your documentation, the less likely you are to have trouble with the IRS.
7. Track Your Mileage
Even when using your personal car, you can deduct the cost of trips you make for business purposes. This doesn’t include your regular commute to and from home, but it could include trips for things like seeing clients (more on that here).
MileIQ is an app that can help you track the miles driven specifically for business purposes.
The Lesson: Track Everything
Aside from the simple (but powerful) move of contributing more to dedicated retirement accounts, the main lessons here are that:
- There are ways to reduce the tax burden of your side income.
- You’ll be in a better position to take advantage of them if you keep good records.
So go out, earn money, and track everything. Your wallet will thank you come tax time!