Think Smart, Save Big: Tax Tips for the Self-Employed
Being your own boss is hard enough, these deductions and suggestions can help.
But by far the most important lesson I learned was that the tax structure for self-employed Americans is entirely different from the one full-timers are accustomed to.
While ponying up roughly 35% of your income for the IRS four times a year is about as desirable as a Saturday trip to the DMV, the trade-offs can be significant -- that is, if you know all the deductions for which you're eligible as a contractor.
The IRS's Schedule C tax form, on which sole proprietors report business gains and losses, "doesn't even begin to hint at all the things that a business can legitimately deduct," certified public accountant Bernard Kamoroff, who wrote 422 Tax Deductions for Businesses and Self Employed Individuals, 7th Edition, told BusinessWeek. To keep your payments low and your profits high, get in the habit of saving your receipts for every purchase you think might classify as a work expense, starting with these categories.
Home Office Space
According to the National Association for the Self-Employed, this is one of the two write-offs that people overlook most often (the other is vehicle usage for business purposes, detailed below). If you have a home office that you use as your primary place of business, you can write it off. (To determine the exact deduction, measure the square footage of both your home office and your entire house, then divide the former by the latter to calculate what percentage of your living quarters your workspace comprises).
Because many sole proprietors pad this ratio or misrepresent a primarily residential space as a work area, some taxpayers worry that the home-office deduction symbolizes a red flag to the IRS, but if you're precise with your measurements and honest about your home-office usage, you most likely won't incur an audit. In addition, if you're a renter whose home doubles as your place of business, you're allowed to deduct your rent as a work expense.
The IRS website states that people who use their cars or trucks for business are eligible to deduct work-related gas, maintenance, and insurance expenses, parking and toll fees, and the cost of overnight vehicular travel and local transportation. The IRS defines "local transportation" as driving from one workplace to another within your tax home (your regular place of work, including the general geographical area in which you conduct business); visiting clients; driving to offsite business meetings; and traveling to temporary workplaces when you have multiple employers. Keep in mind, however, that these criteria apply only to contract workers, not to full-time employees of a single company for whom these activities fall under the personal-commuting category.
Sole proprietors who qualify for vehicular deductions base their calculations on either their actual expenses or the standard mileage rate set forth by the IRS -- for 2009, it's $0.55 per mile. People who opt for the latter method must state their intention to use it during the first year they use their vehicle for business purposes.
Don't go thinking you can write off your next vacation to Bora Bora just because you're self-employed, but if you're traveling for a legitimate business reason, you can deduct many of the expenses you incur during your trip. These include:
- Airplane, train, bus, or automobile travel between your home and your business destination
- Taxi, commuter bus, and limousine fares between the airport, your hotel, and your temporary work location, as well as rental-car fees
- Meals (generally, 50% of the total cost is deductible) and lodging (if your trip is one night or longer, you'll need sleep and sustenance to carry out your work responsibilities satisfactorily)
- Even dry cleaning and laundry!
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