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Tax Time: Self-Help for the Self-Employed
By Emily McDowell
At tax time, the freedom of being your own boss can suddenly
feel like a curse. If you're self-employed, filing your taxes
is never easy--on top of paying almost twice as much for Social
Security and Medicare, you're subjected to a flood of special
rules and regulations. And what about deductions?
The bad news is that because you're your own boss, you have
to pay both the employer's and the employee's portion of your
Social Security and Medicare. If your income is more than
$1,000, you'll also have to file quarterly, estimated taxes--in
other words, the IRS asks you to pay taxes on what you think
you're going to make each quarter.
The good news is that you are entitled to many special deductions,
especially if you work from home, conduct business while traveling,
or use your car for business-related purposes. You may be
able to qualify for a home office deduction, or deduct a portion
of the rent you pay your landlord if you work at home. Along
those lines, you can also deduct a portion of your homeowner's
insurance, utilities and home maintenance costs, as well as
a business phone line and business-related long distance calls
placed on your personal phone. The amount you can deduct depends
on the percentage of your home used for business purposes.
In addition, you can potentially deduct the cost of furniture,
office equipment, and computers. For example, if you're in
the 31% tax bracket, and you buy a $1,000 couch for your home
office, you've only paid $690 for the couch and Uncle Sam
picked up the rest. Business travel, even when combined with
pleasure, can also be deductible, as can certain meals and
entertainment expenses.
If you use your car solely for your job or business, you
can deduct 100% of its operating costs, including maintenance,
insurance, registration fees and depreciation or lease payments.
Even if you use your car for both business and personal purposes,
you can still deduct the business portion of your costs. There
are two ways you can do this: you can take the standard IRS
deduction or you can
calculate the deduction yourself. Check with www.irs.gov for this years' current deductions. The amount you can take
depends on how much you use your car for business. You should
calculate your deduction both ways to see which saves you
more money.
The deductions mentioned above are some of the ways you can
save money with a little know-how. The most thorough tax information
for self-employed individuals is published, believe it or
not, by the IRS. At the IRS' Web site, www.irs.gov,
you can access everything you need in terms of tax guides,
rules, and instructions. These are clear, searchable, and
divided two ways: into large "publications" such as Tax
Guide For Small Business, and then into smaller "Tax Topics,"
like Business Use of Your Car. While there are lots
of great tax books out there, just keep in mind that the IRS
makes several changes to their tax laws each year, and your
book may not have the latest information.
It's a good idea to print out the more complicated information
from the IRS site and keep it in a mini-tax reference library
with your old tax returns and receipts. One of the most important
things to remember is that you need to keep all your receipts
for business deductions you plan to take. This is beneficial
to you for two reasons: you won't forget any deductions, and
you'll have a paper trail of proof in case the IRS questions
your return. While audits don't happen very often, it's always
better to be safe than sorry.
Even if you use an accountant, it's best to know the basics
of filing your taxes: it could save you money and will definitely
make you a savvier tax payer.
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