Whenever I bring up my various side hustles, I’ll sometimes get criticisms that these gigs aren’t worth doing since I have to pay taxes on that income. I was reminded of this in a recent guest post I wrote over on Money Wizard, where I talked about how I’ve made around $90,000 from side hustling over the past four years.
On the one hand, I get the rationale behind this criticism. If I’m making $100 but have to pay a large portion of that income to taxes, then I’m not really making that much, which then begs the question of whether whatever I’m doing is worth my time. This is even more true with side hustle income, which arguably is taxed at your highest marginal tax rate since, in theory, you could have opted to not make that extra income at all. (One solution to this problem is to think about side hustling differently – it doesn’t have to be just about the money.)
That said, this idea that earning extra income isn’t worth it because you have to pay taxes is sort of confusing to me. Making more money – especially if you can make more money doing something that you enjoy and that doesn’t take up much of your time – is something that I think a lot of us want to do. I don’t think I’ve heard of too many people opting to make less money simply so they can pay less in taxes.
Admittedly, I often underestimate the impact of taxes and often downright ignore them when I discuss concepts like the Reverse Latte Factor. There’s a reason for this though. The point of these types of posts is to make a general point about how small amounts matter – especially when combined with the power of time and consistency.
In any event, the truth is that when I think about side hustling and taxes, the actual paying more in taxes part is something that I just don’t worry about too much. There are just so many strategies you can implement to lessen the sting of taxes that I don’t think it’s as big a deal as people think. These are things that you simply can’t do when you’re only working a regular 9-5 job.
In today’s post, I want to go over some of the strategies you can use when it comes to side hustling and taxes.
A Brief Primer On Taxes
Whenever you receive earned income in the United States, you’re responsible for paying taxes on it. As the IRS explains, there are two ways to get earned income:
- You work for someone who pays you; or
- You own or run a business or farm
When you’re side hustling, you’re going to be earning income in that second category since, more likely than not, your side hustle is going to be a business (and probably not a farm). This is true even of simple side hustles where you’re working as an independent contractor. The easy way to think of it is that if you’re getting paid via a 1099, then you are an independent contractor, which makes you a business.
If you’re business, you’re going to be paying taxes. And you’ll be on the hook for a decent chunk of them. Below is a list of the different taxes you’ll pay on your typical side hustle income:
- Federal Income Tax
- State Income Tax
- FICA Taxes (employer portion)
- FICA Taxes (employee portion)
The federal income taxes you pay will depend on how much you earn from other sources of income. State income taxes will also vary based on your income and what state you live in (and in some places, you might have to pay local taxes as well).
The one big downside of side hustling is having to pay self-employment taxes. The government taxes earned income at 15.3% in order to pay for Social Security and Medicare. 12.4% of that goes to Social Security taxes. 2.9% goes to Medicare taxes. If you’re getting paid as a W-2 employee, your employer pays for half of those taxes and you cover the other half (so in your paycheck, you’ll pay 7.65% to Social Security and Medicare).
But when you’re self-employed and earning 1099 income, you’re both the employee and the employer, which means you’re on the hook for paying the entire 15.3% yourself. When you add up the federal and state income taxes you pay, plus the 15.3% in self-employment taxes you’re paying, the taxes can really add up.
Strategies To Deal With The Tax Problem
Because your side hustle likely makes you a business, you have the opportunity to take advantage of a lot of things that can reduce your tax burden. Here are some strategies you can implement:
1. Take Advantage Of Business Expenses
The biggest advantage of side hustling is that it gives you the opportunity to reduce your tax burden in the form of business expenses. Almost everything that you want to buy in life requires you to purchase it using after-tax dollars – that is, money that you’ve paid taxes on already. Business expenses allow you to get around this and purchase things using pre-tax dollars.
Picking up even simple side hustles can open up a lot of potential business expense deductions. For example, every year I deduct the cost of my yearly bike maintenance from my delivery income since I use my bike to do deliveries. This is maintenance that I do every year and while it’s not that much money, it’s still money that I’m able to spend with pre-tax dollars.
There are a lot of other things that might qualify as business expenses – phone bills, any equipment you buy, etc. It’s very likely these are things that you’re already buying anyway. If you can turn it even partially into a business expense, that’s all the better.
Of course, I’m not a tax expert, so be sure to speak to a professional when you’re trying to figure out what qualifies as a business expense. The main point to take away from this section is that side hustling gives you the potential to be creative and pay for things that you might already be paying for anyway, but with pre-tax dollars.
2. Use A Solo 401k To Tax-Shelter Your Income
A lot of people don’t realize that if you’re earning 1099 income, you have access to tax-advantaged accounts that are better than the ones you can get from an employer. The Solo 401k might be the best tax-advantaged account out there – a bonus retirement account that most people won’t have access to. This tax-advantaged account works just like a 401k, only you have more control over your investment options and you can potentially put away much more in tax-advantaged savings.
In the past, making pre-tax contributions was likely the way to go about it. These days though, thanks to some recent tax changes, taking advantage of Roth Solo 401k contributions might be the best way to utilize this extra retirement account. You won’t get a tax benefit now, but your money will grow tax-free forever if you utilize a Roth Solo 401k.
3. The 20% Pass-Through Deduction
Under the recent Tax Cuts and Jobs Act, any income that goes on a Schedule C gets a 20% pass-through deduction. There are some nuances about what type of income qualifies for this deduction, but most likely, your side hustle income is going to qualify you for it. This is definitely true if you’re doing simple stuff like gig economy work.
On a practical level, what this means is that you only have to pay federal income taxes on 80% of your side hustle income. For example, if you make $10,000 worth of side hustle income (after expenses), you’ll only pay federal income taxes on $8,000 of it. The TL/DR is that because of the current tax structure, our side hustle income has some notable tax advantages that make it more advantageous compared to traditional, W-2 employee income.
4. Pay Your Taxes With Credit Cards
One of the overlooked strategies you can use to reduce the impact of taxes is to pay your taxes with credit cards. Taxes are generally our largest yearly expense. Most of us pay our taxes straight out of our paychecks and get nothing back for it.
I’ve been doing it differently. By strategically using credit cards, it’s possible to earn lucrative signup bonuses that you can then use for free travel. This essentially allows you to get something back for the tax spending you’re already doing anyway. For example, if you’re going to pay $3,000 in taxes anyway, opening up a new credit card and getting back $500 to $1,000 in points and miles effectively reduces what you paid in taxes.
I’ve made it a point to pay for everything that I can with credit cards over the past several years. This has made it so that I haven’t had to pay for a flight or hotel in years. It’s also important to remember that points and miles are not taxable, which means I’m able to pay for my travel using what amounts to tax-free income.
If you have to pay taxes anyway, being able to pay them yourself, rather than having an employer pull them out of your paycheck, is actually the best way to do things. I wrote a post about the benefits of paying taxes with credit cards, so be sure to check that post out to get a better understanding of why you should be paying your taxes using your credit cards. If you’re interested in learning more about credit cards and travel rewards, I offer free credit card consultations and I have a list of my favorite credit cards here.
5. The Master’s Rule
A little known strategy for tax-free income that isn’t discussed often is the Master’s Rule. This rule states that you can rent out your primary residence for up to 14 days without having to pay federal income taxes on that income.
This is obviously a specific tactic to use, but worth considering. Most of us probably aren’t in our house for 14 days per year, so renting your house out while you travel is an easy way to bring in some side hustle income with little tax impact.
Final Thoughts
Taxes are a real expense – the largest expense that most of us have. You definitely have to think about them whenever you’re making income.
But it shouldn’t hold you back either. You’re going to have to pay taxes anyway. The beauty of side hustling is that you at least have more options and strategies you can use to reduce the impact of your taxes. Hopefully, this post gives you some ideas.
Disclaimer: I am not a tax professional and anything I say here is not tax or legal advice. Talk to a professional for your own specific situation.
More Recommended Ebike/Scooters
Check out these other ebikes/scooters I've had the chance to do a review for:
- GEN3 Outcross Bike – The GEN3 Outcross is a solid, affordable fat tire ebike that does a good job of doing what I need it to do. It works great for city riding, giving me a smooth ride in all conditions. It’s works really well as a winter ebike since the fat tires give it good traction over snow and ice. Check out my GEN3 Outcross Review.
- Himiway Escape Bike – The Himiway Escape is an interesting bike for anyone looking for a moped-style ebike. If you’re a gig economy worker, the Himiway Escape is particularly interesting and it’s possible to think of it as an investment, especially if you can opt to do deliveries with the Himiway versus using a car. It’s not cheap, but you can definitely make your money back when you compare the mileage you’ll put on your car versus using an ebike. Check out my Himiway Escape Bike Review.
- Espin Sport Bike – The Espin Sport is a good ebike for someone who is looking for an ebike that feels and rides more like a regular bike. There are many ebikes that are really only bikes in name. In reality, they’re basically electric mopeds. The Espin Sport, by contrast, is a bike you could probably ride without the battery and you’d feel like you’re just riding a regular bike. Check out my Espin Sport Review.
- Varla Eagle One Scooter – The Varla Eagle One is an excellent scooter that can make sense for a lot of people. It can work as a primary mode of transportation. You can use it to work on gig economy apps like DoorDash, Uber Eats, and Grubhub. And it can also be a recreational vehicle if you’d prefer to use it for that. Check out my Varla Eagle One Review.
- Fucare H3 Scooter – The Fucare H3 is a fun scooter and I’ve enjoyed testing it out. For a daily commuter or quick trips or errands, the Fucare H3 is probably the scooter I’ll use. It’s portable and easy to maneuver, so it’s just easier to take on the road when I need it. Check out my Fucare H3 Scooter Review.
More Recommended Investing App Bonuses
For additional investing app bonuses, be sure to check out the ones below:
- M1 Finance ($10) – This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $10 for opening an account. Check out my M1 Finance Referral Bonus – Step-By-Step Guide.
- SoFi Invest ($25) – SoFi Invest is an easy brokerage account bonus that you can earn with just a few minutes of work. Use my SoFi Invest referral link, fund your SoFi Invest brokerage account with $100 and you’ll get $25 of free stock. I also have a step-by-step guide for the SoFi Invest referral bonus.
- Moomoo (5 free stocks) – Moomoo is a free investing app currently offering 5 free stocks (usually worth around $75-$100) if you open an account using a referral link and deposit $2,000. Read my Moomoo referral bonus guide for more information.
- Webull (5 free stocks) – Webull also gives you 5 free stock valued between $3-$3,000 each if you open an account using my referral link. Here’s a guide I wrote about how to earn your free stocks using Webull.
- Robinhood (1 free stock) – Robinhood gives you a free stock valued between $2.50-$225 if you open an account using my referral link.
- Public (1 free stock) - Public gives you a free stock valued between $3-$70 if you open an account using my referral link.
More Recommended Bank Account Bonuses
If you’re looking for more easy bank bonuses, check out the below options. These bonuses are all easy to earn and have no fees or minimum balance requirements to worry about.
- Chime ($100) - Chime is a free bank account that offers a referral bonus if you use a referral link and complete a direct deposit of $200 or more. In practice, any ACH transfer into this account triggers the bonus. This bonus is easy to earn and posts instantly, so you’ll know if you met the requirements as soon as you move money into the account. I wrote a step-by-step guide on how to earn your Chime referral bonus that I recommend you check out.
- Upgrade ($100) – Upgrade is a free checking account that’s currently offering a $100 referral bonus if you open an account and complete three debit card transactions. These bonus terms are easy to meet, so it’s well worth doing this bonus as soon as you can. Importantly, this bonus says that it’s now scheduled to end on October 31, 2022. As long as you get your account opened before October 31st, you should be eligible. Here’s a post I wrote with more details: Upgrade $100 Referral Bonus – Step By Step Directions.
- SoFi Money ($350) – SoFi Money is a free checking account from SoFi. They’re currently offering a $25 referral bonus if you open a SoFi account with a referral link and deposit $10. You can also make an additional $300 as well if you complete a direct deposit. This is a good bank that is also 100% free, so you won’t have to worry about managing this account. Here’s a post I wrote with instructions on how to earn your SoFi Money bonus: SoFi Money Referral Bonus: Step By Step Guide.
- Fifth Third Bank ($250) – This offer is limited to customers in the following states: Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, Tennessee, West Virginia, and South Carolina. If you don’t live in one of those states, you won’t be able to open an account online but you can still open an account in-branch if you happen to be visiting a city that has a branch. This is a fairly easy bank bonus to earn, especially since there are plenty of data points showing what will trigger the direct deposit requirement. In addition, you can open the Fifth Third Momentum Checking bank account, which comes with no monthly fees or minimum balance requirements. Read my guide on this bonus here.
- Current ($50) – Current is a free fintech bank that’s offering new users a $50 referral bonus after signing up for an account using a referral link.Current is an easy bonus to earn and also gives you access to three savings accounts that pay you 4% interest on up to $2,000. That means you can put away up to $6,000 earning 4% interest. That’s very good and makes Current an account I recommend to everyone. Check out my step-by-step guide on how to earn your Current Bank bonus.
- OnJuno ($100) – OnJuno is a fintech/neobank that is currently offering a $100 referral bonus if you open an account using a referral link and complete a direct deposit of $250 or more. The account has no fees or minimum balance requirements. Even better, the bonus posts immediately after you meet the requirements. If you can meet the direct deposit requirements, OnJuno is an easy bank bonus that’s worth snagging. Check out my OnJuno referral bonus guide here.
- Varo ($50) – Varo is a free fintech banking app similar to Chime or Current. It’s currently offering a $50 bonus to new users that open a new Varo account with a referral link. The bonus for this bank is very easy to meet, all you need to do is spend $20 within 30 days of opening your Varo account. Check out my step-by-step guide to learn how to earn this bonus.
- Fairwinds Credit Union ($100) – Fairwinds Credit Union is offering a referral bonus for users that sign up using a referral link. Fairwinds has no fees or minimum balance, so this is a particularly easy bonus to earn. Since this is a smaller credit union, my gut instinct tells me this offer won’t be around long, so if you’re in a position to meet the bonus requirements, grab this bonus before it’s gone. Here is my step-by-step guide on how to earn your Fairwinds Credit Union bonus.
- Novo Bank ($40) - Novo bank is a free business checking account that’s currently offering a $40 bonus if you open a Novo business checking account using a referral link. In addition to being a good bank bonus, Novo is also a good business checking account. It has no monthly fees or minimum balance requirements and operates a good app and website. Indeed, it’s the business checking account I currently use for this blog. Check out my post on how to easily open a Novo account.
- Spiral ($50) – Spiral is a fintech bank that's currently offering new customers a $50 signup bonus after opening a free checking account with them. The Spiral referral bonus is especially good because it's a free checking account and doesn't require a direct deposit to earn the bonus. Here is my step-by-step guide on how to earn your Spiral Bank bonus.
- One Finance ($50) – One Finance is a fintech bank that’s currently offering a $50 signup bonus if you open an account using a One Finance referral link and have a direct deposit of $250 or more. This is a completely free bank account with no minimum balance requirement, so if you can meet the requirements, it’s worth doing. Check out my One Finance referral bonus guide here.
- Albert ($150) – If you can manage to do a real direct deposit, Albert is an easy account you can use to earn a referral bonus. Here’s a review about Albert I wrote. And here’s a step-by-step guide on how to earn your Albert referral bonus.
- Netspend ($20 + 5% Interest Savings Account) – Netspend is a company that provides 5% interest savings accounts. If you sign up using my referral link, you’ll get a $20 signup bonus once you make your first deposit into your Netspend account of $40 or more. That means you get a 5% interest savings account and a free $20 to start! Make sure to check out my in-depth guide on how to set up these accounts.
Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link, and an additional $300 if you complete a direct deposit.
- Upgrade Bank. Upgrade is a free checking account that’s currently offering a $100 referral bonus if you open an account and complete three debit card transactions. These bonus terms are easy to meet, so it’s well worth doing this bonus as soon as you can. Note that it’s now scheduled to end on October 31, 2022.
- Novo Bank. Novo bank is a free business checking account that’s currently offering a $40 bonus if you open a Novo business checking account using a referral link. It’s the business checking account I currently use for this blog.
- M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $10 for opening an account.
- Personal Capital. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.
Feel free to send Kevin a message here.
My dad once told me that a self-employed friend of his would complain about making more money because of the extra taxes he’d have to pay. Dad and I just shook our heads.
Never really made much sense to me. Like I sort of get it, but it seems like making more money is something everyone wants to do.
It’s amazing the amount of stuff you can write off. Actually wrote off too much and am having to re-do my taxes and take off some expenses, since I’m trying to qualify for a mortgage. This year’s taxes are getting me the SW business card signup and SW priority signup, for almost 145k miles, and a companion pass.
I’m also happy to know about the solo IRA options- I had no idea about this until a few months ago. Actually your site was the one that let me know about this, and I’ve since told many of my friends about this who are all self-employed- we are all starting to contribute to these now.
Don’t forget that if you are self-employed, you can get your own health insurance, and pick a plan with an HSA. I am doing that with a plan I got thru the marketplace for a very reasonable amount per month.
Your site has really motivated me a lot to start side hustling- a lot of the opportunities you use aren’t available to me, but some are, and I’ve definitely been easing into them.
Good point about the HSA. Insurance is also a deductible expense, which is helpful for my current situation since I need insurance anyway.
Glad that you’ve been able to do some side hustling. The key is to take what works for you, disregard the rest. We all have unique lives that require our own specific strategies.
In order to take advantage of #1 to #3, do you need to create a legal business entity for your side hustle income?
I think of income taxes on the margin. You have your current base level income (however you define it). If you do more work, you will have more income but it is taxed at your marginal rate. That can be substantial depending on your tax bracket, the inclusion of FICA taxes and any state & local income taxes. So the decision variable is the net expected income. Is working another X hours per week for Y dollar of incremental net income worth it? I phrase the question as “Is X hours of my free time worth Y dollars?”
I don’t think so- one of my businesses is just me- my music performing gigs. I’ve never gotten a business license for this, most people I know haven’t done this either- just report our 1099s etc, write off whatever, etc. When I set up my solo401k I didn’t have to supply my biz license (I do have one, for another non-music gig I do).
Assuming then this all worked for the pass-thru, I have 0 income that’s W-2. Will have to take a look at what turbotax generated.
You don’t need a legal business entity for any of them. Whenever you make money not from a W-2 job, you’re automatically a sole proprietor.
How do you learn to do your own taxes?
Like anything, you read about it from people with more knowledge. There’s a lot of benefit to doing your own taxes so you can understand how the tax code works.