Laura answers a listener's question about maximizing tax deductions for multiple sources of income and side gigs.
Laura answers a listener's question about maximizing tax deductions for multiple sources of income and side gigs.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today's topic comes from Rhonda J., who describes herself as "a woman of many hats." She says:
"I have many sources of income, including a part-time job, long and short-term rental properties, and a flower farm. I am very busy, and I need to keep track of a lot of documentation for taxes. I've had the same company preparing my taxes for many years, but I wonder whether I need a tax accountant, tax preparer, and/or CPA. Who should I ask to help me optimize my taxes and take advantage of as many deductions as possible?"
Thanks for your question, Rhonda! This post will review some of the best ways to cut taxes when you have a side gig, solo venture, or small business. You'll learn legitimate, money-saving deductions and which type of professional can optimize your taxes.
Thanks for downloading episode 903 of the Money Girl podcast! I'm Laura Adams, an award-winning author, money speaker, on-camera spokesperson, and founder of The Money Stack, a free Substack newsletter.
You can learn more and connect with me at LauraDAdams.com. That's also where you can email your money question and sign up for The Money Stack, which gives subscribers a terrific Money Success Toolkit. You can also record a brief question or comment on our voicemail line at 302-364-0308.
7 ways having a business cuts taxes
According to the Small Business Administration, as of 2024, there are more than 33.2 million small businesses, defined as employing fewer than 500 or no people. They make up 99.9% of the nation's businesses! That's a lot of part- and full-time entrepreneurs with opportunities to cut their taxes and save money.
While self-employment benefits you financially in many ways, we'll review seven common tax deductions that can save you the most, whether you're just starting a business or juggling multiple income streams, like Rhonda.
1. General business expenses.
The IRS allows you to deduct all business costs if they're "ordinary" and "necessary" for your trade or business. Here are some examples:
This list isn't complete, so be sure to check out Publication 535, Business Expenses, for more information on potential deductions for your business.
In general, you can't deduct personal or living expenses. However, if you have personal and business costs, such as a vacation combined with an industry conference in Hawaii, you can deduct the portion used for business. In addition, having a home office allows you to deduct certain personal costs, which I'll cover next.
2. Home office expenses.
If you use part of your home for your own business, you may be allowed to claim a valuable home office tax deduction. I'll give you an overview here, but also listen to episode 900, Home Office Tax Deduction: 5 Essential Rules to Maximize Your Savings in 2025, for more information.
If you're self-employed, you can claim a home office deduction whether you're a homeowner or renter. You can have part- or full-time business income regardless of your business entity, such as being a sole proprietor or LLC. You don't need a business license, tax ID number, or any documentation to claim valid home office deductions for your business.
To qualify for a home office tax deduction, you must use your office exclusively for business, which must be the principal place you conduct business. That means you typically need a dedicated space in your home where you primarily and consistently work. But you can also work in other places like in clients' homes, coffee shops, or a co-working space.
As I mentioned, your business could be part-time. If you're like Rhonda, with a job at another company, and work on your business from home in the evenings or on weekends, you're still qualified for the deduction if you meet these requirements.
The types of home office expenses you can claim fall into two main categories: direct and indirect. Direct costs are for your home office only. For instance, if you create an office in your spare bedroom by painting the room, installing carpet, and purchasing a desk, those expenses are 100% deductible.
But the best part about claiming the home office deduction is that it turns some of your everyday costs, known as indirect expenses, into business deductions. You'd have these expenses even if you didn't have a home office, such as rent, mortgage interest, property taxes, insurance, maintenance, cleaning, utilities, and garbage disposal. However, expenses unrelated to your home office, such as adding a pool or remodeling other parts of your home, are never deductible.
Indirect home office expenses are partially deductible based on the size of your office but depend on how you calculate the deduction. You can choose a standard or simplified method to determine the largest possible tax break for your home office in any year.
The standard method requires determining the percentage of your home used for business. You apply that percentage to all indirect costs. For example, if your office is 10% of your home, and you have a $100 power bill, $10 would be a deductible business expense, and $90 would be a personal expense. You figure home office expenses using Form 8829, Expenses for Business Use of Your Home, and file it with Schedule C, Profit or Loss from Business.
The simplified home office deduction gives you $5 per square foot of your office area, up to 300 square feet. So, that caps your deduction at $1,500 (300 square feet x $5) per year. If you have a smaller home office, the simplified method may be best, and you enter your information on Schedule C. If you're unsure which method saves the most, you can calculate both options.
3. Vehicle expenses.
If you own or lease a personal vehicle you drive for your business, you can deduct expenses based on your business mileage. You must keep detailed records of your trips to allocate business versus personal miles driven. However, you can deduct all its costs if your vehicle is used solely for business.
Like the home office deduction, you can calculate a vehicle deduction based on your actual expenses or a simplified method. With the actual method, you must keep good records, such as tracking your fuel, maintenance, insurance, lease payments, loan interest, depreciation, registration fees, taxes, parking, and tolls.
You can deduct a portion of your vehicle's actual expenses based on your business use percentage. For instance, if 10% of your total annual miles driven are for business in a given year, you could deduct 10% of your vehicle expenses.
The simplified vehicle deduction gets calculated at a rate per mile, which is 70 cents for 2025. For instance, if you drive 1,000 miles for business, your maximum vehicle deduction would be $700 (1,000 x $0.70). However, you can also deduct parking fees, tolls, and a portion of interest (based on your business use) on an auto loan when you claim the vehicle mileage rate.
In general, the more expensive your vehicle is to operate, the better off you'll be using the actual cost method. You may come out ahead using the mileage deduction for more economical cars.
Some handy apps, such as MileIQ, automatically record your vehicle's movement and prompt you to allocate trips as personal or business. That can make record-keeping for the vehicle deduction much easier! Check out Publication 463, Travel, Entertainment, Gift, and Car Expenses for more information.
4. Insurance expenses.
Having the right insurance is critical for surviving unexpected financial hardships; many are deductible when self-employed. They include policies for business liability, interruption, errors and omissions, malpractice, property, cyber theft, and vehicles.
As previously mentioned, a portion of your homeowners or renters insurance is deductible when you claim a home office. However, they don't cover lawsuits related to your business or any inventory or equipment stolen or damaged in a covered natural disaster. So be sure to have specialized business insurance based on your potential risks, such as driving for your business or seeing clients in your home.
5. Travel and meal expenses.
If you go out of town on business, travel costs, including airfare, ground transportation,
and lodging, are tax-deductible when you're self-employed. However, meals are handled differently and are only deductible up to 50%.
Tax reform eliminated the deduction for business entertainment; however, you can still claim half the cost of meals if you purchase food or beverages during a recreational event. Just like with other types of deductions, keeping good records and receipts is critical.
As I previously mentioned, if you extend a business trip into a personal holiday, you can deduct a portion of expenses based on the percentage of time you spend on the business. That's an easy way to save money when work takes you to a destination where you want to spend extra time!
6. Retirement account contributions.
If you think being self-employed is a disadvantage when saving for retirement, it's time to change your thinking. There are some fantastic retirement tax benefits designed for anyone with business income.
Like employer-sponsored plans, such as a 401(k) or 403(b), retirement accounts for the self-employed help you accumulate a nest egg and keep more of your hard-earned money by reducing taxes.
When you invest pre-tax money in a traditional retirement account, you avoid paying taxes on contributions and growth in the account until you withdraw funds. You may also have the option to choose a Roth account, which does require you to pay taxes upfront but allows tax-free withdrawals. A Roth may allow you to avoid tax on decades of
earnings, which could be a massive savings.
Remember that with most retirement plans, withdrawing before age 59.5 typically means you're subject to income tax plus an additional 10% early withdrawal penalty. So, it's important not to contribute money you might need for everyday living expenses.
A SEP-IRA, or Simplified Employee Pension, is a traditional IRA for anyone self-employed without or with employees, no matter your legal business entity. If you have employees, they can never contribute their own money; contributions can only come from an employer.
For 2025, you can make SEP-IRA contributions up to 25% of compensation or your net earnings for a maximum of $70,000. But if you have a bad year with little profit, you can choose not to contribute to your SEP-IRA.
A solo 401(k) is a traditional 401(k) or a Roth 401(k) for anyone self-employed with no employees other than a spouse. As both the employer and employee in your business, you can contribute a maximum of $70,000. Plus, there are additional catch-up contributions if you're over 50.
Another good retirement account option, if you have little business income or can't contribute much, is an IRA or individual retirement account. For 2025, you can contribute up to $7,000 or $8,000 if you're over 50. However, there are income limits to qualify for a Roth IRA.
RELATED: 4 ways to fund a Roth no matter your income
7. Qualified business income deduction.
The Tax Cuts and Jobs Act created the qualified business income (QBI) deduction; however, it expires at the end of 2025 unless it gets an extension. It allows owners of "pass-through" businesses, including sole proprietorships, partnerships, and S corporations, to deduct 20% of their income.
The QBI deduction amount depends on your total taxable income, including your business income, wages, interest, and capital gains. To qualify for 2025, you must have taxable income below $191,950 as an individual or $383,900 if you file taxes jointly. For all income under those thresholds, 20% does not get taxed.
However, some service professionals, such as doctors and attorneys, are disqualified from the QBI deduction when their income reaches higher thresholds.
How to choose a tax return preparer
Since these seven deductions aren't the only ways to reduce taxes when you have business income, I highly recommend hiring a tax professional. Not hiring a pro can be costly because even tax software can make mistakes when your situation is complex.
Rhonda asked who she should turn to for help, and it's an excellent question. There’s a wide range of tax return preparers with different levels of education and experience, including certified public accountants (CPAs), enrolled agents (EAs), and others with no professional credentials.
An essential difference in the types of pros is whether they have unlimited rights to represent you before the IRS if you get audited. For instance, enrolled agents are licensed by the IRS and must pass a comprehensive exam showing proficiency in federal tax planning, individual and business tax return preparation, and representation. They must complete 72 hours of continuing education every three years.
Certified public accountants also have representation rights but are licensed by state boards of accountancy. They must complete an accounting degree at a college or university, pass a rigorous exam, and have met experience and ethics requirements. CPAs must complete levels of continuing education, and some specialize in tax preparation and planning.
Although your tax return preparer signs your paperwork, you're ultimately responsible for the accuracy of every entry. That's why I encourage you to understand the basics of taxes and what is and isn't a legitimate deduction.
Unfortunately, scammers and criminals pose as legitimate tax professionals. I recommend staying away from anyone who asks you to sign a blank form or claims they will get you a larger refund or lower taxes than the competition. Also, avoid anyone who charges a fee based on a percentage of your refund or offers to deposit any funds into their financial accounts.
Rhonda, I recommend using a reputable CPA licensed in your state for the highest level of expertise. If you have questions or need representation before the IRS, you want to work with someone or a firm that will be available years from now.
Taxes for businesses, real estate, and home offices can get complicated, so work with someone who is familiar with the types of businesses you run and asks many questions about your records and receipts.
If you're not getting a high level of expertise from your existing tax preparer or believe they aren’t working hard enough to reduce your tax liability, find someone else who is a CPA. You might ask other business owners you know for a recommendation or use the IRS directory of tax preparers with specific credentials, such as being a CPA in your area.
Yes, good tax pros cost money. But in my experience, they can save you even more!
Before we go, here's a quick reminder to subscribe to The Money Stack, my Substack newsletter, when you visit LauraDAdams.com. It's filled with money tips, tools, news, challenges, and things I enjoy! You can subscribe for free or become a paid member with access to live educational events.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Brannan Goetschius is our director of podcasts, Holly Hutchings is our digital operations specialist, Morgan Christianson is our advertising operations specialist, Davina Tomlin is our marketing and publicity associate, and Nathaniel Hoopes is our marketing contractor.