Latest / The Marketing Career Podcast with Fexingo: Marketing Jobs, Skills, and Career Growth / How Marketers Use the Side Hustle Tax Strategy
Transcript
- Lucas: So, mid-career marketers love side projects — newsletters, consulting gigs, YouTube channels. But there's a quiet conversation happening right now among people who've been doing this for a few years, and it's about whether you can actually turn those side projects into tax deductions. Luna: And not just the obvious ones like your home internet bill. I've heard people talking about deducting their coffee shop meetings, their laptop, even a portion of their rent. Lucas: Exactly. And the IRS has something called the 'hobby loss rule.' It's section 183 of the tax code, and it basically says if your side project doesn't look like a real business, those deductions can get denied. The threshold: you need to show a profit in at least three out of the last five tax years. Luna: Three out of five — that's the safe harbor. So if you've been running a marketing newsletter for four years and you've never made a dime, the IRS considers that a hobby. Lucas: Right. And if it's a hobby, you can deduct expenses only up to the amount of income you earned. Which for most side projects starting out is zero. But if you can show a profit motive — that you're genuinely trying to make money — you get the full business deduction treatment. Luna: And how do you prove profit motive? I mean, if your newsletter has twelve subscribers and zero sponsors, that's pretty hard to argue. Lucas: The IRS looks at nine factors. The big ones: Do you carry on the activity in a businesslike manner? Do you maintain separate books and records? Do you have a business plan? Have you tried to get clients or customers? I tell people: the sooner you start documenting your intent, the better. Keep a log of your outreach. Save screenshots of your pitch deck. If you ever get audited, you want to show a pattern of genuine business effort. Luna: There was a Tax Court case last year — I think it was a branding consultant who deducted about $22,000 in expenses over three years against maybe $5,000 in income. The court disallowed $17,000 of it because she couldn't show she was seriously trying to make a profit. She had no business plan, no separate bank account, and she spent money on things like a dedicated office space before she had a single client. Lucas: That's the classic red flag. You can't build a Ferrari before you've sold a single ticket. The rule of thumb I've heard from tax pros is: your expenses should be proportional to your income trajectory. If you're making $2,000 a year from freelance ghostwriting, you don't need a $5,000 standing desk and a $1,200 ergonomic chair. Luna: But isn't there a middle ground? I know a lot of marketers who use their side projects as a way to test new skills or build a portfolio. They're not necessarily trying to make a profit in year one. Lucas: That's totally fine — the safe harbor gives you a three-out-of-five window. Year one can absolutely be a loss. Year two can be a loss. By year three, you need to show some revenue, even if it's small. The IRS expects a trajectory toward profitability, not a perpetual write-off machine. Luna: So what's the smartest move for a marketer starting a side project today? Should they set up an LLC? Open a separate checking account? Lucas: Step one: separate bank account and a separate credit card for the business. That alone makes an audit infinitely easier. Step two: if you're going to claim a home office deduction, it has to be used exclusively and regularly for your business. Not the kitchen table you clear off at night — a dedicated room or a clearly defined space. Luna: And the home office deduction is one of the biggest red flags for the IRS, right? I've heard that it increases your audit risk. Lucas: It does, especially if you're claiming a large percentage of your rent. But if you have a legitimate dedicated space, the simplified option is $5 per square foot up to 300 square feet — so a maximum deduction of $1,500. That's less audit-prone and doesn't require depreciation recapture when you sell your home. Luna: What about things like your cell phone bill or internet? Can you deduct a percentage? Lucas: Yes, but only the business-use percentage. If you use your phone 30 percent for the side hustle, you can deduct 30 percent of the bill. But you need to have a log or some reasonable basis. The IRS isn't going to accept a guess. I tell clients to use a time-tracking app for a month and use that as your baseline. Luna: And what about bigger purchases — like a new laptop or a camera for YouTube? Is that a full deduction in the first year? Lucas: You can use Section 179 to deduct the full cost in the year you buy it, up to a limit. For 2025, the limit is about $1.16 million, so most marketers will be fine. But be careful: if you use the laptop for personal stuff too, you can only deduct the business-use percentage. And if you claim 100 percent business use, you'd better have a separate device for personal. Luna: Right. And I think this is the ethical line that a lot of people skate close to. I've seen marketers deduct their entire coffee shop tab for three months because they 'worked there' for two hours a week. That's aggressive. Lucas: It's aggressive, and it's the kind of thing that if you get audited, the agent is going to disallow it and possibly flag your return for a full exam. The better approach: keep it reasonable. Deduct the coffee when you're actually meeting a client or conducting a business conversation. Not your Monday morning solo writing session. Luna: Actually, that reminds me of something. A lot of marketers I know are starting podcasts or YouTube channels. Can you deduct your microphone, your editing software, even your hosting fees? Lucas: Absolutely, as long as you have a profit motive. If your podcast has zero listeners and no monetization plan, the IRS will call it a hobby. But if you've got a business plan — maybe you're trying to get sponsors, or you use it to attract consulting clients — then those expenses are deductible. The key is documentation. Write down your business plan. Track your outreach to sponsors. Show that you're treating it like a business. Luna: So it's not just about having the deduction. It's about the story you can tell the IRS. Lucas: Exactly. And that story should start before you file your first tax return. Which is why I think every marketer with a side project should sit down in January — not in April — and map out their business plan for the year. Luna: If these marketing conversations have sparked something you've actually used, honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small way to keep this ad-free and focused on practical stuff like this. Luna: Exactly. Now, back to the tax strategy. One thing I want to dig into is how to handle the first year of a side project. You mentioned the three-out-of-five rule, but what if you start in November and make no revenue until March of the next year? Lucas: Good question. The three-out-of-five period is measured on a rolling basis. So if you start in November 2025, your first tax year is 2025. If you have a loss, that's fine. Year two, 2026, maybe another loss. Year three, 2027, you should show some profit. The clock starts ticking the first year you have any activity. Luna: So there's really no grace period. If you start in December, you're on the hook for that year. Lucas: Right. And the IRS can look back at all open years. So if you're audited in 2028, they can go back to 2025 and check your pattern. That's why it's so important to have a business plan from day one. Luna: Let's talk about the flip side: what if you actually do make a profit? Do you have to pay self-employment tax on that? Lucas: Yes. If you're a sole proprietor or single-member LLC, your net income from the side hustle is subject to self-employment tax — that's 15.3 percent for Social Security and Medicare. But the good news is you can deduct half of that on your Form 1040. Luna: So it's not all downside. You get the deductions, but you also have to pay taxes on profit. Lucas: Exactly. And if you structure your side project as an S corporation, you might be able to save on self-employment tax by paying yourself a reasonable salary and taking the rest as distributions. But that's more complex and not necessary for most marketers starting out. Luna: What about state taxes? Do all states follow the same hobby loss rules? Lucas: Most states conform to federal rules, but some — like California — have their own quirks. California doesn't automatically adopt federal safe harbors. So if you're in California, you should check with a local tax pro. Luna: Good to know. I think the takeaway here is that the side hustle tax strategy is powerful, but it requires discipline. Lucas: Discipline and documentation. If you can show the IRS you're running a real business — even if it's small — you can take advantage of deductions that make your side project more viable. And that's a win for your career and your portfolio. Luna: Absolutely. And I think for mid-career marketers, that side project is often the thing that leads to their next full-time role or a consulting pivot. Lucas: Right. So don't let the fear of taxes stop you from starting. Just start smart.