Use side hustle to lower your income tax from regular 9-5 job

Jul 14, 2023


Are you tired of paying high income taxes on your regular 9-5 job? If so, then it's time to consider starting a side hustle. Not only can a side hustle provide you with extra income, but it can also help you lower your income tax. In this blog post, we will explore how you can use a side hustle to reduce your tax burden and keep more of your hard-earned money.

Understanding the Benefits

One of the key advantages of having a side hustle is that it allows you to take advantage of additional tax deductions and credits. By running your own business, you become eligible for various tax breaks that can significantly lower your taxable income.

1. Self-Employment Tax Deductions

When you have a side hustle, you are considered self-employed. This means you can deduct expenses related to your business, such as office supplies, equipment, and even a portion of your home if you have a dedicated workspace. These deductions can help offset your overall income and reduce the amount of self-employment tax you owe.

side hustle office

2. Retirement Contributions

Another advantage of having a side hustle is the ability to contribute to a retirement account. By opening a solo 401(k) or a Simplified Employee Pension (SEP) IRA, you can save for your future while simultaneously reducing your taxable income. This is a win-win situation as you are not only lowering your tax liability but also securing your financial future.

3. Health Insurance Premiums

If you are self-employed, you can deduct your health insurance premiums as a business expense. This deduction can significantly reduce your taxable income and lower the amount of income tax you owe. Make sure to keep track of all your health insurance expenses and consult with a tax professional to ensure you are taking full advantage of this deduction.

side hustle health insurance

Maximizing Your Side Hustle's Tax Benefits

Now that you understand the potential tax benefits of having a side hustle, it's time to maximize those advantages. Here are a few tips to help you make the most of your side hustle when it comes to lowering your income tax:

1. Keep Detailed Records

It's essential to keep meticulous records of all your business-related expenses and income. This includes receipts, invoices, and any other relevant documentation. By maintaining accurate records, you can substantiate your deductions and avoid any issues with the IRS.

2. Consult with a Tax Professional

While it's possible to navigate the tax implications of a side hustle on your own, consulting with a tax professional can provide you with expert advice tailored to your specific situation. They can help you identify additional deductions and credits you may not be aware of, ensuring you take full advantage of all available tax benefits.

tax professional consultation

3. Plan Ahead

Take the time to plan your side hustle activities strategically. By understanding the tax implications of your business decisions, you can structure your operations in a way that maximizes your tax benefits. For example, timing your expenses and income can help you optimize your deductions and minimize your tax liability.

Deducting Losses from a Side Hustle Against Earned Income

Many individuals engage in side hustles to pursue their passions, supplement their income, or explore entrepreneurial opportunities. However, if your side hustle generates a loss, you may wonder if it's possible to deduct that loss against your earned income from your 9-5 job. While there are certain rules and limitations to consider, it is indeed possible in some cases. Here's an overview of how you can potentially deduct a loss from your side hustle against your earned income:

  1. Business vs. Hobby:  

    Firstly, it's essential to establish that your side hustle is recognized as a business activity rather than a hobby. The IRS distinguishes between the two based on factors such as profit motive, time and effort devoted, and the expectation of making a profit. To qualify as a business, you must engage in your side hustle with the intention of generating a profit.
  2. Sole Proprietorship or Single-Member LLC:

    If your side hustle operates as a sole proprietorship or a single-member LLC (taxed as a sole proprietorship), any losses incurred can be reported on Schedule C of your personal tax return (Form 1040). This form allows you to report business income and expenses.
  3. Net Operating Loss (NOL):

    If your side hustle generates a loss that exceeds your income from the venture, you may have a net operating loss (NOL). In some cases, you can use the NOL to offset your other income, including your earned income from your 9-5 job. This can potentially reduce your overall taxable income.
  4. Limitations on Deducting Losses:

    Deducting losses against your earned income is subject to certain limitations. The IRS has rules in place to prevent individuals from using business losses to offset all of their income indefinitely. For example, if your adjusted gross income (AGI) exceeds a certain threshold ($160,900 for individuals and $321,800 for married couples filing jointly in 2021), the deduction of business losses may be limited.
  5. Passive Activity Losses:

    It's important to note that if your side hustle qualifies as a passive activity, there may be additional limitations on deducting losses. Passive activities are generally business ventures in which you do not materially participate, such as certain rental properties. These losses are subject to specific passive activity loss rules and may only be deductible against passive income.
  6. Seek Professional Advice:

    Navigating the complexities of deducting losses from a side hustle against earned income can be challenging. To ensure compliance and maximize your deductions, it's highly recommended to consult with a qualified tax professional or accountant. They can assess your specific circumstances, guide you through the process, and help you optimize your tax strategy.

Remember, tax laws and regulations can change, so it's essential to stay updated and seek professional advice tailored to your unique situation. By properly documenting and reporting your side hustle activities, you can potentially deduct losses against your earned income and reduce your overall tax liability.

In Conclusion

A side hustle not only provides you with additional income but also offers numerous tax advantages. By taking advantage of self-employment tax deductions, contributing to retirement accounts, and deducting health insurance premiums, you can lower your income tax from your regular 9-5 job. Remember to keep detailed records, consult with a tax professional, and plan ahead to make the most of your side hustle's tax benefits. Start your side hustle today and take control of your financial future!