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.