LUTZ BUSINESS INSIGHTS
Side hustles and their tax implications
TY BARDSLEY, Senior accountant
Intern: Michael Monico
Whether you have a hobby or passion that grows into a full-blown business venture or want extra cash, side hustles are a great way to earn additional income. Recent studies suggest that about 69.8 million Americans are involved in side gigs in one way or another. Consequently, the studies show that one in three full-time workers have side gigs, and almost half of the side hustles are owned by millennials looking for alternative sources of income.
Although side hustles are a great way of earning extra income to pay off some debt or go on vacation, you still need to account for and pay taxes on money earned lest you get fined by the government. If any of your gigs makes over $400, you must report that income on your Form 1040. While avoiding taxes is not an option, running your own business allows you several tax benefits unavailable to full-time workers. Self-employment affords you tax breaks, credits, and deductions that significantly reduce your tax burden, thus leaving more money at your disposal for personal use and reinvestment. Here are four ways a side hustle can implicate your taxes.
1. Business Meal Costs and Travel Expenses
With a side gig, you can deduct 100 percent of your meals if they are directly related to the business (50% in 2023). These include meals with vendors, customers, etc. You can also deduct 100 percent of the travel expenses like hotel, airfare, car rental, uber and parking. These are tax benefits that are unique to self-employed individuals and businesses, and they are worth taking advantage of.
2. Deduct Classes, Seminars, and Subscriptions
It is important to note that costs related to your professional development can help you improve your business and be deducted from your taxes. These costs include class registration fees, seminar costs and membership dues. Books, magazines, and online subscriptions can also qualify as deductions.
3. Qualifying Business Income (QBI) Deduction
As a self-employed individual, you may be eligible for the Qualifying Business Income (QBI) deduction created by the Tax Cuts and Jobs Act of 2017. This type of deduction can amount to 20 percent of the income earned from the side hustle. However, the QBI deduction may be subject to various limitations depending on the type of trade or business and your total income. Limitations can be driven from the amount of W-2 wages paid by the qualified business or trade, and the unadjusted basis immediately after acquisition (UBIA) of qualified property of the qualified business or trade.
4. Home Office Deduction
While generally full-time employees cannot claim the home office deduction, self-employed workers and small business owners may be eligible. To qualify for a home office deduction, you must meet these two requirements:
Use the space regularly and exclusively
The portion of your house that you use for the side gig must be used regularly and exclusively for business purposes. Whether it’s an apartment, a home, a mobile house, a condo, a garage, a boat, or a workshop, they all qualify.
The space acts as the principal place of business
The home office must also be your business’s headquarters. It can be where you meet customers regularly, and no other location is used to perform these duties.
The Bottom Line
While starting a side gig has its challenges, its monetary benefits can make it worthwhile. A side hustle will provide you with extra income and may grow into a full-time job if you work to make it thrive. If you are serious about establishing a side hustle, be sure to review and take advantage of these tax benefits. Contact us today if you have any questions or learn more about our tax services.
ABOUT THE AUTHOR
TY BARDSLEY + SENIOR ACCOUNTANT
Ty Bardsley is a Senior Accountant at Lutz. He is responsible for preparing individual and business income tax returns, as well as providing general accounting assistance to clients in a variety of industries.
AREAS OF FOCUS
- Accounting & Consulting
- BS in Accounting, Nebraska Wesleyan University, Lincoln, NE
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