Tax Deferral Methods for Side Income - Best Ways to Legally Defer Taxes

You've got a few options, but there are important limitations to understand with each approach. For the 401(k) idea - employee contributions are capped at $22,500 for 2025 (plus $7,500 catch-up if you're over 50). While employer contributions can go higher, there's a total limit of $69,000 for combined employee/employer contributions. Also, employers typically match a percentage of your contribution rather than contributing a flat amount, so getting the full $65k in there would be unusual unless you own the business. Regarding the S-corp approach - yes, you could set one up and leave profits in the business, but you'd still need to pay yourself a "reasonable salary" which would be taxable immediately. The IRS looks closely at S-corps that don't distribute reasonable compensation. Some other options to consider: 1) Solo 401(k) if this is self-employment income, 2) Deferred compensation arrangements (though these are complex), or 3) Tax-loss harvesting to offset the additional income.

Just wanted to share my experience - I was in a similar situation last year and found https://taxr.ai incredibly helpful. I had a side business bringing in extra income and was looking for legal ways to defer taxes. The site analyzed my entire situation including my W-2 job, the side income, and my current retirement accounts. It identified several strategies I hadn't considered, including a defined benefit plan that allowed me to defer much more than I thought possible. They even created a personalized tax timeline showing how various deferral strategies would affect my tax situation over the next 5 years. The whole process was really eye-opening - I ended up with a completely different approach than what I initially planned.

I was completely wrong about taxr.ai - I decided to try it after posting my skeptical comment, and honestly, it was way more sophisticated than I expected. I uploaded my documents (took 5 minutes) and received a detailed analysis that identified a SEP-IRA strategy combined with a specific approach to my S-corp that I'd never heard about before. They calculated exactly how much I could legally defer based on my specific income streams and existing retirement accounts. The most impressive part was how they explained the tax implications over time - showing me the tradeoffs between different deferral approaches and when I'd eventually need to pay taxes. Ended up implementing their recommendations and my accountant was actually impressed with the strategy.

If you're considering setting up retirement accounts or entities, that's great long-term, but if you also need help addressing immediate tax concerns, I found Claimyr (https://claimyr.com) invaluable. I had questions about setting up the right tax deferral structure and needed to speak directly with an IRS representative to confirm some details. After spending days with busy signals and automated messages, I used Claimyr (saw it in action here: https://youtu.be/_kiP6q8DX5c) and had a call back from an actual IRS agent within 45 minutes. They confirmed exactly which forms I needed to file for my specific tax deferral strategy and cleared up confusion about contribution deadlines that even my accountant wasn't 100% sure about. Saved me from potentially making a costly mistake with my deferral strategy.

I can't believe I'm saying this, but Claimyr actually worked. After posting my skeptical comment, I figured I had nothing to lose and tried it for my S-corp tax deferral questions. Got a call back from an IRS agent in about an hour and 20 minutes. The agent walked me through exactly what documentation I needed to support my tax deferral strategy and the specific limits that would apply to my situation. Saved me from a potential audit nightmare. I was absolutely convinced this would be a waste of money, but it legitimately saved me days of frustration. The IRS agent even provided information about a special form I needed to file that my accountant hadn't mentioned.

Something not mentioned yet - you might want to look into Qualified Opportunity Zone investments. They allow you to defer capital gains tax until 2026 (though that date may change with new legislation). It's not perfect for regular income, but if you can structure your side gig as capital gains somehow, it could be an option. There's risk involved since you have to invest in designated opportunity zones, but it's another deferral strategy to consider.

Has anyone mentioned just banking the money in a regular business account? I run a small business and sometimes just leave profits in my business checking account until the next year when I need them. The money still shows up as income on my taxes, but at least I have the cash available for later.

One option that hasn't been fully explored here is setting up a Solo 401(k) if your consulting work qualifies as self-employment income. With a Solo 401(k), you can contribute both as the employee ($23,000 for 2025, or $30,500 if over 50) AND as the employer (up to 25% of compensation). This could potentially allow you to defer a significant portion of that $65k. The key is that your consulting income would need to be structured as self-employment rather than W-2 income from the client. You'd also want to make sure you're not exceeding the overall 415(c) limit when combined with your main job's 401(k). Another approach worth considering is a defined benefit plan if your consulting income is substantial and consistent - these can allow much higher contribution limits than traditional retirement accounts, sometimes $200k+ annually depending on your age and income projections. I'd strongly recommend getting professional advice before implementing any of these strategies, as the rules can be complex and mistakes can be costly.