The independence that comes with being your own boss is often a double-edged sword. On one hand, it’s liberating to be free of corporate shenanigans; on the other, you’re on your own figuring things out.
Including your taxes.
Filing taxes can sometimes be a source of dread for self-employed Americans. But the trick is not to see the tax code as bureaucracy meant to confound you but rather a tool to give your home-grown business a leg up. You can deduct a host of expenses if you keep good records and know what to look for.
To help, here are nine tax tips for making your 2012 returns less of a headache and a bit more financially advantageous:
Remember That You Did NOT Pay Taxes on the Front End: This can be a shock to first-time filers, but self-employed workers pay no up-front taxes. While salaried workers get paychecks with taxes already taken out, that’s up to you, since you are your own payroll department. If you did not set aside any money for the tax man, your bill might be high … and you better start making a plan for the current tax year, too. Read all about self-employment tax burdens here on IRS.gov.
Don’t Fear the Home Office Deduction: The IRS has been cracking down on abusers in the last several years. But if you are honestly using a space and can conform to guidelines for an exclusive use space (as in, don’t put a bed for guests or video games for the kids in there) then you should not be scared out of this big-time deduction. Qualified home offices open the door to breaks for real estate taxes, utilities, insurance and more. View get the guidelines and forms here on the Internal Revenue Service’s website.
Don’t Fear Vehicle and Travel Deductions: Ditto with vehicle expenses and travel expenses. It’s highly unlikely that you can claim 100% business use of a vehicle or write off your daily Starbucks run, so both are big red flags with the IRS. But if you keep good travel records and don’t abuse the deductions, you have nothing to fear. Get business vehicle guidelines here and extensive travel and entertainment tips here on IRS.gov.
Supplies and Professional Dues Count, Too: Hopefully you also kept records for that office chair or special design software. These, too, are deductible. Similarly, so are professional liability insurance premiums, fees for trade associations and other charges that are the cost of doing business in your field. Keep good records and write them off.
Don’t Forget Depreciation: If you have a big fixed asset expense such as a jackhammer or a copying machine, remember you can write off part of the value each year as the equipment ages. Get specific guidelines on how to calculate depreciation at IRS.gov.
Be Diligent About Income Records: If you’re a busy contractor or freelancer, it’s crucial you keep accurate records of your true income and track down the relevant 1099s and other documentation. You could get audited if the numbers don’t add up or if you miss a tax form, so make sure you check for complete records before filing.
Deduct Your Health Insurance: Being self-employed means no corporate sponsor providing extensive benefits. So if you are footing the bill for your own health insurance, remember you can deduct the full cost on your personal tax returns.
Don’t Get Greedy: As you can see, there are plenty of advantageous write-offs that the tax man offers. But don’t take advantage of the IRS or you could get burned with steep fines. Generally, a qualified business expense “must be both ordinary and necessary” in government terminology. This are slippery terms, of course, but keep them in mind as you do your returns. If you act in good faith, you’ll be fine.
When All Else Fails, Write Off Tax Preparation: If you’re confused or intimidated, keep in mind that you can deduct your tax preparation expense — like books full of tax tips or preparation software — so there’s no reason not to get the help you need when preparing your 2012 taxes.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.