When you move from employee to self-employed/business owner a treasure trove of new deductions and options becomes available to you.
Do you run a side hustle or have been considering starting one? Awesome! When you move from employee to self-employed/business owner a treasure trove of new deductions and options becomes available to you. Make sure you are optimizing your side hustle to your maximum benefit.
Here’s what you need to know:
Consider Your Business Structure
Turn your side hustle into a legitimate business by, at the very least, forming an LLC. This limits your personal liability and gives you more flexibility in deciding how you will derive income from the business i.e. wages vs. pass-through income. There are many things to consider when deciding on a business structure. We previously published information on choosing a business structure here. When in doubt, consult a tax professional to discuss your options.
Home Office Deduction
That room in your house/apartment you use to carefully piece together hand-made décor for sale in your Etsy shop; that man cave you respond to emails in; the expenses associated with those rooms may be deductible! To figure the deduction you generally take the percentage of the room divided by the overall square footage of the home and multiply that percentage by the overall expenses of the home. Let’s say your home is 1,500 sq ft and the portion of your home you use for business is 150 sq ft. Your home office deduction is equal to 10% of your home expenses. Capiche? This may include rent, mortgage interest, real estate taxes, home repairs, insurance, utilities etc.
199A Qualified Business Deduction
The Tax Cuts and Jobs Act enacted a new deduction for business owners that allows them a deduction of up to 20% of their qualified business income. This provides those with a side hustle an opportunity to disproportionately grow their income in relation to their tax liability. For a more comprehensive discussion see our previous publication on this deduction here.
Start up expenses- in the first year of business you can deduct certain organizational costs associated with getting your side hustle up and running
Cell phone, internet, automobile expenses, meals, travel- depending on your business, you may be able to deduct a portion of these expenses
Self employed health insurance- if you pay for health insurance out of pocket, a side hustle may allow you to take a deduction for that
Business Losses to Offset Personal Income
Business losses can be used to offset income from your full-time job. This has the potential to reduce your overall tax liability. Be careful about showing a loss year after year though. The IRS distinguishes between a hobby and a business. Hobby losses are non-deductible and may be re-classified as such by the IRS if the business continues to show a loss year after year. No Bueno! Consult with a tax professional to avoid falling into this trap.