The IRS requires you to report all self-employment income over $400. Business tax deductions lower both income tax and self-employment tax, and they work separately from the standard deduction.
A deduction is an "ordinary and necessary" business expense that reduces your taxable income. If you earned $10,000 from side work but deducted $4,000 in expenses, you would pay taxes on $6,000 instead.
Here are the main categories of deductible side hustle expenses.
Mileage: The 2025 IRS mileage rate is 70¢ per mile for business driving. This excludes your regular commute to a place of business. A driver with 5,000 business miles can deduct $3,500.
Home office: Use the simplified method to deduct $5 per square foot of dedicated workspace, up to 300 square feet (maximum $1,500). The space must be used exclusively and regularly for business.
Phone and internet: Deduct the percentage of your bill that relates directly to your side hustle. If 40% of your usage is business-related, you can deduct 40% of those costs.
Supplies and tools: Keep receipts for materials, software, and equipment. Larger purchases like laptops or cameras may need to be depreciated over several years rather than claimed all at once.
Advertising and marketing: Deduct paid ads, website domains, business cards, and other promotional costs to attract customers.
Platform and transaction fees: Fees charged by Etsy, Lyft, DoorDash, PayPal, and Stripe are fully deductible from your gross income.
Professional services: Deduct fees for CPA assistance, legal consultation, or tax software.
Insurance: Business-related insurance premiums are deductible, including car insurance for delivery drivers. You can deduct only the business percentage of the premium, or use the mileage rate instead.
Education: Deduct costs for courses and certifications that help you perform your side work.
Startup expenses: During your first year in business, you can deduct up to $5,000 in startup costs. Amounts beyond that must be spread over time.