5. Take advantage of tax deductions
One sweet thing about taking on a side hustle: You may be able to deduct work expenses that you can’t deduct for your full-time job.
A home office is a good example. If you’re a W-2 employee who works remotely, you can’t deduct costs related to your home office. But if you have a side gig and you use part of your home exclusively as your principal place of business, you can deduct your expenses — including your mortgage or rent, insurance, and maintenance costs — for that portion of the home.
Suppose your home office is 200 square feet of your 1,000-square-foot home. You could deduct 20% of your housing expenses. (Check with IRS Publication 587 to be sure you’re following all the rules.)
You may also be able to deduct expenses like computer equipment, meals, travel, and your cellphone if they’re for business use. But it’s essential to keep careful records so you can show that the expenses are business-related, rather than personal. If you’re unclear about what’s allowed, be sure to check with a CPA.
What should you do with your side hustle money?
Assuming you don’t need your side hustle income to pay bills, focus on putting your side hustle money where you can get the biggest return. If you have high-interest debt, like credit cards, that’s the best place to start. The average credit card APR for cardholders who carry a balance is above 16%, so every extra dollar you pay above the minimum essentially gives you a 16% return.