Side hustling provides a perfect opportunity for many people to earn more money, expand their skills and explore creative career directions. But side hustling usually leads to more complex tax returns. People unaccustomed to the complexity of self-employment tax returns can skip valuable tax deductions and credits.
If you’re an afterthought, you may qualify for deductions or credits designed for the self-employed. Skipping these deductions could mean leaving extra money with Uncle Sam. These are a few deductions that are often overlooked for scammers.
In collaboration with TaxSlayer, we’re going to explore eight different tax benefits that may qualify you as a side job. These may save you tax. And if you’re not sure about your eligibility, TaxSlayer can help! Check out TaxSlayer here and get started on your tax return today >>
Top 8 Tax Breaks for Side Hustlers for the 2021 Tax Year
These tax breaks are some of the best ways for scammers to save money on their 2021 tax bill. As you complete your taxes this season, keep these deductions and credits in mind.
The Qualified Business Income Deduction (QBI)
The Qualified Business Income Deduction (QBI) is a deduction available through 2025. Under current tax laws, business owners with taxable income less than $164,900 ($329,800 for joint filers) can deduct 20% of their business income from their taxable income.
The deduction has a phase-out period for individuals earning between $164,900 – 214,900 or joint filers earning between $329,800 – $429,800.
The beauty of the QBI deduction is that entrepreneurs don’t have to “do” anything to prove they deserve the deduction. You simply declare your self-employment income in the appropriate tax forms and follow the instructions to calculate your deduction. Side note: If you use TaxSlayer Self-Employed, the QBI deduction will be calculated for you.
Check out TaxSlayer here and get started >>
Covid-19 tax credits for the self-employed
The US bailout plan included several tax provisions for people directly affected by COVID-19. One of the most valuable provisions is a form of “medical leave” for the self-employed.
Self-employed persons (including side tensioners) may qualify for a tax credit for absenteeism due to illness. With the sick leave tax credit, filers can claim a tax credit worth up to 100% of their average daily income (max: $511 per day) for up to 10 days of work missed due to Covid-19 complications. The person must have been incapacitated for work between 1 January and 30 September for the following reasons:
Experiencing symptoms of COVID-19 and seeking a medical diagnosis. Seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19 and the person has been exposed to COVID-19 or is unable to work pending the results of the test or diagnosis, or obtaining immunization related to COVID-19 or recovering from an injury, disability, illness or condition related to the immunization.
Self-employed workers can also claim credit worth up to $200 per day or 67% of their average income if they have missed work due to family obligations related to Covid-19.
Caring for an individual who is subject to a federal, state, or local quarantine or isolation order related to COVID-19, or has been advised by a healthcare provider to self-quarantine due to concerns related to COVID-19; Caring for a child when the child’s school or daycare is closed, or childcare is unavailable due to COVID-19 precautions; or experiencing another substantially similar condition, such as accompanying a person to obtain immunization related to COVID-19, or to care for a person recovering from an injury, disability, illness or condition related to the immunization.
Tax software like TaxSlayer Self-Employed makes it easy to claim these types of deductions because it will explain exactly what it takes to qualify.
Telephone and internet costs
Few people can run their side business without a cell phone and the Internet. Those who register their use can deduct the part of their use that is related to their secondary activities. To claim this deduction, you must have a written record of the expense and some form of written documentation showing what percentage of the expense was for your afterthought.
If you want to be 100% sure that you only report business use of your phone and internet for the sake of this deduction, you may want to buy a second line for your business.
Equipment purchases (Article 179 Deduction)
When you buy equipment (including phones, computers, or other assets), you can either depreciate the asset over its useful life, or you can claim the full deduction in the year you purchase the item. For example, you could write off a $600 tablet used to fulfill orders in six years. Or you can write off the entire purchase in the year you buy it.
Often, treating these assets as expenses is the best way to manage your company’s finances.
Retirement accounts
Sides can use a SEP-IRA or an individual 401(k) to protect some of their money from income taxes. Contributions to these accounts are tax-free and profits accrue tax-free. However, you will have to pay tax on the money when you withdraw the money when you retire.
Pension contributions are subject to income restrictions, and taxpayers face limits on their total IRA contributions. That means contributing to a SEP IRA can prevent you from contributing to a Roth IRA or a traditional IRA.
Likewise, total employee contributions to a 401(k) are capped at $19,500 for all 401(k) accounts. A supporting actor with a 401(k) at work should be careful not to contribute too much between the two accounts.
Side jobs have until April 15 to complete their contributions to tax-sheltered retirement accounts.
Business use of a vehicle
When you drive a car for your casualty, you can claim a mileage or car expense deduction. Side jobs can claim $0.56 per mile driven for their business, or they can claim a portion of their actual vehicle costs for the year. Whichever method you choose, you will need a written statement of your mileage.
If you are looking for a driving or delivery service, make sure you keep track of your mileage. You might even consider using an app to help you keep up.
Then, when you file your tax return, software such as TaxSlayer will ask you how many miles you have driven for business. It’s much easier to answer if you’ve kept accurate records all year!
Home office deduction
The home office deduction allows you to deduct expenses related to having and maintaining a home office. People who can designate a specific space as their “self-contained zone” can deduct a portion of their total housing costs (including utilities) from their taxes.
To qualify, your home office must be used solely for your business and you must do most of your business from that space. In other words, if you do your day-to-day work from the same desk, the space doesn’t qualify.
The home office deduction has two formulas that can be used. The simplified option allows a person to deduct $5 per square foot of space used, for a total of 300 square feet. A person with a three-by-three foot space dedicated to their business can deduct $45 from their taxes.
The more complex method is the proportional method. If someone lives in 900 square feet and spends nine square feet on their home office, they can deduct 1% of their total cost of living. If their total rent and utility costs are $15,000, they can deduct $150 for the year. Again, your actual expenses must be reported, so this option is best for sideline activities that keep good, organized records.
Continuing education
Online courses, formal education, conferences, training, subscriptions to industry publications and books may be deductible, provided the educational materials have helped you develop your business. To qualify for this deduction, the courses or materials must be relevant to your current field and help you develop or improve in this field.
If you didn’t do a good job of separating business and personal finances, check your purchase history to see if you’ve purchased any relevant courses or books that can be deducted. Not everything qualifies, but you may encounter some deductible surprises in your purchase history.
Final Thoughts on Tax Deductions for Side Hustlers
Side hustling adds income, increasing the amount you may have to pay in taxes. However, sidekicks can minimize their taxes by tracking expenses and understanding deductible expenses.
We recommend TaxSlayer for side hustlers this year because TaxSlayer Self-Employed gives you access to all the small business tax forms you need for one low price. Other tax software can end up costing you $100 just to file a little bit of income from work — and that’s not right.
Plus, if you have questions about expense deductibility, TaxSlayer Self-Employed can be an inexpensive way to get an expert involved. They can answer your questions and help you complete your tax return.
TaxSlayer Self-Employed helps you claim all the tax credits and deductions you qualify for – it’s part of their maximum refund guarantee. And your return is guaranteed to be accurate based on the information you provide, so be sure to enter your independent expenses carefully – you don’t want to miss an opportunity to save!
Get started with TaxSlayer here >>
This post The best tax breaks for side-hustlers this year
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