What you can deduct on side income

Updated November 2026 · 2026 tax year · 9 minute read

Every legitimate expense of your side business reduces the profit you pay tax on, and because side income is hit by both income tax and self-employment tax, each dollar you can properly deduct is worth more than most people expect. This guide explains what counts, what does not, and how to keep the deductions you claim safe if you are ever asked about them.

The basic test: ordinary and necessary

The IRS allows you to deduct business expenses that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your line of work. A necessary expense is one that is helpful and appropriate for your business. It does not have to be indispensable. A photographer's camera, a freelance writer's grammar software, and a dog walker's leashes and liability insurance all clear the bar easily.

Two further ideas matter. First, the expense has to be for the business, not for you personally. Second, if an item has both business and personal use, such as a phone or an internet connection, you can deduct only the business share. The IRS expects that share to be reasonable and supportable, not a guess you pulled out of the air.

How expenses reduce your tax bill

You report side-business income and expenses on Schedule C, and only the net profit is taxed. If you earned $12,000 and had $3,000 of legitimate expenses, you owe tax on $9,000, not $12,000.

The savings come twice. Take a taxpayer in the 22% federal bracket. A $1,000 deduction cuts income tax by about $220. It also cuts self-employment tax, which is 15.3% of 92.35% of net profit, by roughly $141, and half of that reduction is itself deductible. After those interactions, $1,000 of deductions is worth roughly $345 of federal tax, before any state savings. If your regular wages already exceed the Social Security wage base ($184,500 for 2026), the self-employment saving is smaller because only the 2.9% Medicare portion applies on the margin. In either case, an expense of $1,000 does not cost you $1,000. The tax saving covers a meaningful fraction of it. But a deduction is never a reason to buy something you do not need: you still spend $1,000 to save a few hundred dollars.

Common deductible expenses

These are the categories side-business owners most often claim. Which ones apply depends on what you do.

• Supplies and materials. Printer ink, packaging, shipping materials, raw materials for products you make, and small tools.
• Cost of goods sold. If you resell products, what you paid for the inventory you sold is subtracted from sales. This is tracked on a separate part of Schedule C.
• Software and subscriptions. Accounting software, design tools, scheduling apps, stock photo plans and similar services used for the business.
• Advertising and marketing. Online ads, business cards, a website, domain name and hosting, and sponsored posts.
• Professional fees. Payments to a bookkeeper, tax preparer, lawyer or other contractor. The portion of tax-prep fees related to your business is deductible.
• Platform and payment fees. Marketplace listing and selling fees, payment-processor fees, and commissions charged by gig platforms.
• Business insurance and licenses. Liability insurance, professional licenses, permits, and state or local business registration fees.
• Phone and internet. The business-use percentage of your monthly bills.
• Education and training. Courses and books that maintain or improve skills you already use in your business. Training that qualifies you for a brand-new trade is generally not deductible.
• Travel. Airfare, lodging and local transportation for trips whose main purpose is business. See our guide to the mileage deduction for driving.
• Business meals. Generally 50% of the cost of a meal with a client or business contact, when you or an employee are present and the meal has a clear business purpose.
• Home office. If you use part of your home regularly and exclusively for the business. The rules are strict, and we cover them in the home office guide.

Equipment: the $2,500 rule and depreciation

Larger purchases such as a laptop, camera, or power tools are normally treated as assets that are written off over time through depreciation. There are two important shortcuts. The first is the de minimis safe harbor: if you do not have an audited financial statement, you can deduct items that cost $2,500 or less per item or per invoice in the year you buy them, as long as you elect this treatment on your return and follow it consistently. The second is the Section 179 deduction, which lets you deduct the full cost of qualifying business property in the year you place it in service, within limits that are well above what a typical side business spends. Business use matters here too. If a laptop is used 70% for the business and 30% for personal browsing, you can generally deduct only 70% of its cost.

Startup costs

Money spent before your first sale is treated differently from ordinary operating costs. For a business that begins operating, you can generally deduct up to $5,000 of startup costs in the first year, and that amount is reduced dollar for dollar once your total startup costs go over $50,000. Any remainder is spread over 180 months. Startup costs include market research, advertising before opening, training, and legal fees to set up the business. The business has to actually get started for these to be deductible. If you buy equipment and never launch, the costs are likely personal.

Deductions that are not on Schedule C but still matter

Several valuable deductions live on other parts of your return. They reduce your income tax but, with one exception, not your self-employment tax.

• Half of your self-employment tax. You can deduct the employer-equivalent half of the tax from your income. Our self-employment tax guide has the math, and the calculator builds it in automatically.
• Self-employed health insurance. If you pay your own health insurance premiums and have net profit, you may be able to deduct them, up to your net profit from the business. You cannot take it for any month in which you were eligible to join a subsidized plan through your own or your spouse's employer, which rules it out for many people with full-time jobs.
• Retirement contributions. Contributions to a SEP-IRA or solo 401(k) can be deducted. See retirement accounts for the self-employed.
• The qualified business income deduction. Up to 20% of qualifying profit, subject to income limits. It is covered in our QBI guide.

What you cannot deduct

• Commuting. Travel between your home and your regular workplace, including a day-job office, is personal.
• Personal and family expenses. Groceries, personal phone lines, and your daily wardrobe do not become deductible because you eat or dress while working. Clothing counts only if it is required for the job and not suitable for everyday wear, such as safety gear or a branded uniform.
• Your own time. You cannot deduct the value of your unpaid labor.
• Fines and penalties. Parking tickets and tax penalties are not deductible.
• Expenses for an activity that is really a hobby. See hobby vs business.
• Anything you cannot support. A deduction that is legitimate but undocumented can be disallowed.

A worked example

Dana works full time and designs wedding invitations on weekends. In 2026 she collects $14,000 from customers. She pays $1,900 for paper, envelopes and shipping, $360 for design software, $540 for her portion of an online-store subscription and payment fees, $300 for a business license and liability insurance, and $430 in advertising. She also buys a $1,200 printer, and she claims it under the $2,500 safe harbor. Her total expenses are $4,730, so her Schedule C profit is $9,270. Her self-employment tax is $9,270 × 92.35% × 15.3%, or about $1,310. She can then deduct half of it, $655, when figuring her income tax. Without the expenses she would have owed income tax and self-employment tax on the full $14,000. Her deductions saved her somewhere near $1,600 in federal tax if she is in the 22% bracket, which is why careful tracking pays.

Keep the proof

The IRS does not require a particular filing system, but it does expect you to be able to show what you spent and why. Keep receipts or statements, note the business purpose when the receipt does not make it obvious, and keep personal and business spending separate. Our guide to recordkeeping for side income walks through a simple system that takes about fifteen minutes a month.

If you are unsure whether something qualifies, the safest approach is to ask a licensed tax professional before you claim it. A short consultation costs far less than a notice from the IRS.

Run the numbers with the free calculator

This guide is general information, not tax advice. Tax rules change and individual circumstances differ. Confirm the details for your situation with the IRS or a licensed tax professional.