Tax Deductions and Your Side Hustle

These days, dozens of side-hustles are easily available. You can:

• Walk dogs on Rover 

• Drive for Uber or Lyft 

• Freelance on Upwork 

• Shop for Instacart

• Deliver meals for DoorDash 

The above jobs don’t even consider the endless number of side hustles you could conjure up. 

There’s no denying it; the side hustle is on the rise. One in three Americans has one, with another 20% saying they intend to start one soon. While creating a side hustle can be as simple as logging into an app, the taxes associated with it are more confusing than your average day job. Do you owe tax on side income? And what side hustle tax deductions can you legally take?

The basics of side hustle taxes

Before we get into the nitty-gritty, let’s start with the basics. Here’s what you need to know about side hustle taxes. 

Side hustle income is taxable 

Whether you’re earning money from your job or side hustle, you need to report the income to the IRS (and to your state if you live in a state with income tax). The IRS requires that you file a tax return if you earn more than $400 from self-employment in a given year. You’ll pay income tax and self-employment taxes on side-hustle income. 

Tax forms (1099s)

If you earn more than $600 from a company as a contractor, freelancer or gig-economy worker, you may receive a 1099-MISC or 1099-NEC from that company. 

These are simple forms that list how much you have earned in the year. You’ll need these 1099s when filing taxes. However, you should report the income even if you don’t receive a 1099.  

Filing “Schedule C”

Schedule C - Profit or Loss From Business is the main tax form that most side-hustlers file. You’ll file this simultaneously with your standard tax return each April. 

Deducting expenses

The form clarifies things: You list all your income and all your expenses. The expenses reduce the income and leave you with net profit or loss. This net profit or loss transfers to your primary income tax return (Form 1040).

You can’t deduct side hustle expenses outside of Schedule C

To take advantage of side hustle tax deductions, you’ll file Schedule C. You can’t list the deduction as a personal deduction on your income tax return. This is true even if you itemize your deductions. If you’re wondering how to avoid paying taxes on side jobs, the only legal way to do so is to deduct qualifying business expenses on Schedule C. 

Upgraded tax software

If you do your taxes using software like TurboTax, TaxACT, HR Block, etc., you may need to pay for the upgraded software version to report self-employment income properly. If you work with an accountant, they’ll file Schedule C for you.

Consider a business license 

Most side hustles are really side businesses. Therefore, you may need a business license to remain compliant with state requirements. For very casual side hustles (watching a neighbor’s kids once a week, for instance), you may be able to get away with no license — check with your state and local authorities for information. 

Side hustle tax deductions

For many side hustles, a wide variety of expenses can be deducted. Broadly, most expenses directly required to operate your business/side hustle may qualify as a deduction on your side hustle taxes. 

Some common business expenses that could be used for a tax deduction include:

• Advertising

• Driving expenses (for business-related travel)

• Commissions and fees

• Contract labor

• Insurance

• Legal and professional services

• Office expenses

• Rent for office/workspace

• Supplies

• Travel and meals, in some cases

• Business start-up costs

Additionally, the cost of goods sold can be deducted. Cost of goods sold refers to the cost of any items bought and then resold — or to any supplies necessary to sell your wares. 

For example, a food truck would deduct all their food purchases and the cost of to-go containers, napkins, etc., as the cost of goods sold. 

For more information, see the IRS instructions for Schedule C.

Example tax deductions

A person can deduct from their side hustle will vary based on income, profession and other factors. Here are some common side hustle examples and what someone may qualify to deduct. 

Rideshare driver

A rideshare driver may be able to deduct:

• Gas

• Auto maintenance

• Tolls and fees

• Uber/Lyft fees and commissions

• Snacks/refreshments for passengers

• Vehicle expenses 

While you can keep track of all business-related gas and maintenance expenses, the simplest method for rideshare drivers is to use the Standard Mileage deduction. This allows Uber & Lyft drivers to deduct $0.56 per mile driven to estimate the cost of vehicle maintenance and gas.  

Freelance writer

A freelance writer may be able to deduct:

• Cost for software used in the business

• Cost for payment processing fees

• Marketing/advertising expenses

• A new computer or other required business equipment

Dog walker

A dog walker may be able to deduct:

• Cost for doggie bags, treats and other work-related expenses

• Cost for business insurance

• Advertising/marketing expenses

Online tutor

A tutor or online teacher may be able to deduct:

• Internet bill (the portion used for business)

• Home office expenses (see IRS guide)

• Equipment such as a web camera 

How to file taxes on side jobs

If you have a side hustle that’s a part-time job (meaning you are an employee of the company), you’ll file taxes normally. You’ll receive a W2 from the employer and report this with the W2 from your primary job. 

If you have a side hustle that is more like a business (driving rideshare apps, delivering food, freelancing, etc.), you may need to file Schedule C to pay side hustle taxes. File the form with your normal tax return in April. 

Wrapping up

A side hustle can be a great way to boost your income, helping to build a nest egg or pay off debt. But, every side hustle is unique, so make sure to consult with a certified tax professional before filing and claiming deductions.

If you’re using your side hustle to pay off debt, check out Tally†, a personal finance app that helps Americans consolidate credit card debt and save money. 

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.