The average person now has, or is at least thinking about getting themselves a side gig. This is due to the decline in high paying jobs, more competition, higher cost of living, constant need for more education, and the vast amounts of debt eating away our pay checks.
Below our several tricks to avoid over-paying the IRS for the extra income earned through a side gig. In order to make the most out of your side gig, you must turn the gig into a bona-fide business. This means that you will treat the new business in accordance with reasonable business practices.
Work with an Accountant
Working with an accountant will cost you money up front, but they will help you avoid costly mistakes in the future.
A good accountant will know exactly how to maximize the tax savings, based on your circumstances.
Save for Retirement
Contributing extra money to a 401(k) or Traditional IRA will provide an immediate tax deduction.
Contribute to a Health Savings Account
If you’re eligible for a health savings account, you can minimize your tax bill. An HSA is one of the only accounts that offers a TRIPLE tax-break.
- Contributions are tax-deductible (like a 401(k) or Traditional IRA).
- Money grows tax-free inside the account.
- Withdrawals are tax-free when used for medical expenses.
Deduct Business Expenses
As long as you’re really running a business, any money you spend on the business can be deducted at tax time, which directly lowers your tax bill. When you’re running a side gig, it can sometimes be unclear which expenses are deductible.
Here are great ways to keep track:
- Hire an accountant with business experience.
- Have a separate business checking account. Use it exclusively for business purposes.
- Have a separate business credit card.
- Keep receipts for everything.
- Use accounting software to track everything.
Home Office Deduction
There are many requirements you have to meet in order to claim a home office deduction. The main one to considered is making sure the space is exclusively used for business purposes. Any space that mixes in personal use doesn’t count. This is an important deduction to qualify for, so make sure you are following the deduction rules word for word.
Track Internet and Phone Use
If you’re using your personal phone or Internet for business, you may be able to deduct a portion of those bills as a business expense.
Track Your Mileage
Even when using your personal car, you can deduct the cost of trips you make for business purposes. Keep a log in your car that enables you to track mileage, purpose of trip, date and times.