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Last Updated on May 23, 2020 by Ellen
Frustrated with your side business taxes? Having a side hustle can be a great way to help you pay off debt, add a little extra income into your budget, and even help you accomplish your savings goals. However, if you’re not careful, your side hustle could end up costing you more money than you make!
Side Business Taxes and How To Reduce Them
If you make enough money from your side hustle, you will have to start paying taxes on the money you make. Here are tips to help reduce your side business taxes so you won’t take a substantial financial hit.
Do I have to pay taxes on hobby income?
Hobby or side income, any income that you make is taxable. If this is a hobby, you will need to report it on Form 1040 line 21. Hobby income may not be subject to self-employment tax. But, you still need to claim it as income.
How much can you make on the side without paying taxes?
Many people believe that you don’t have to pay taxes on income under $600 but that is not true. The IRS requires you to pay taxes on ALL income. The $600 figure is the point where a business or person must send you a 1099 form and report the income they paid you to the IRS. It has nothing to do with when you have to pay taxes on it.
Use Your Side Hustle Money to Save for Retirement
Maxing out your IRA or 401k account can help you lower your taxable income by a significant amount. Using your side hustle money to put toward your retirement account won’t necessarily lower how much your side hustle gets taxed, but it will lower how much YOU get taxed, which means you can use the difference to offset your side hustle taxes.
Deduct Business Expenses from Your Side Hustle Business
If you sell crafts or have any business expenses associated with your side hustle, deduct those expenses! As long as you are treating your side hustle like a business and not as a hobby, you can end up with quite a few business expenses over time. Even the fees attached to your PayPal invoices and the amount you pay your accountant to file are all deductible!
Keep Track of Your Phone, Home, and Even Internet Usage
If you use a portion of your home, your phone, or your internet for your side hustle business, you may be able to justify having these as deductible expenses. These will significantly lower your bills because it will be considered partially business expenses. This isn’t a change you’ll see on a day to day, but you’ll notice it when you go to file your taxes.
Work with An Accountant
As we mentioned earlier, your ability to work with an accountant will depend on you having the upfront money, but you can deduct this expense as a business expense. Accountants are great at finding ways that you may be able to save money or even things you forgot or didn’t know you could deduct on your taxes.
Stay Under $600 Per Year
If you stay under $600 per year, you may not have to pay anything at all in taxes. This will vary by state and county so it’s very important that you check with your accountant. You must report all income though, no matter how much you earn. If you only need to make a little bit of money each year, this can be a great way to ensure that you don’t have to pay ANY taxes on your side hustle! While this limits what you can do as a side hustle, it’s a great option if you only need a little extra cash each year.
While these won’t necessarily keep you from owing money by the end of the year, these tips will significantly impact how much money you do owe at the end of the year. You may want to consider incorporating your business to save on taxes.