"It can be a whole new world for many people who have never worried about
paying taxes because it was done through their employer," Linton said.
There are, however, some basic rules that can help the self-employed save money, avoid headaches and avoid raising the ire of the IRS.
First, Linton says, remember that Uncle Sam doesn't regard just anyone as self-employed. As a general rule, accountants say those who have earned more than $400 in income that was not subject to withholding taxes, normally qualify.
The next step is figuring out what can be deducted to lower the total tax bill.
Here's where tax experts say many self-employed people can save
thousands of dollars through simple steps that include knowing what
counts as a deduction, good record keeping and planning ahead.
| | Expert Tip |
Invest in a tax-deferred savings retirement plan, such as a Simplified Employee Pension (SEP-IRA), or a SIMPLE IRA.
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Simply put, deductions are anything used to do business. Sound broad? It is, but experts say the self-employed are entitled to deduct everything from the cost of renting an office space to phone expenses and even magazine subscriptions, as long as it is used as part of their business.
"You can ask yourself two questions: Does this directly impact my business?," said Kevin Coleman, a Los Angeles-based CPA. "And secondly, is there any personal use involved with this expense?"
So for example, those who want to write off the cost of their cellular phone as a business related deduction must make sure they use it primarily for business.
"It is reasonable to take a 100 percent deduction on that cell phone if you spend 85 percent of the time you use it making business calls," Coleman said.
The key is not getting carried away and claiming everything as a business
expense.
Expert Tip | |
Investigate what taxes you are expected to pay. Being self-employed
doesn't get you off the hook from paying other types of taxes. For example if you hire an employee part-time, you still may be expected to pay an employment tax.
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Perhaps one of the most confusing situations arises for people who work from home. The good news is they are entitled to deduct part of their rent or mortgage. For example, freelance journalists who turn
a spare bedroom, or even part of a room into an office can deduct a
portion of their rent or mortgage as a business-related expense.
Again, the important thing to prove is that it is the primary place of business.
Moreover, thanks to a change in the in the tax law, more self-employed people can take advantage of the home office deduction.
Independent contractors, computer consultants and even doctors can deduct part of their rent, as long as it is used for administrative or management activities and there is no other fixed location, such as an office, used for the same purpose.
The self-employed also shouldn't forget to include other business-related expenses, such as professional dues, seminars, and transportation costs. (Yes, they can get a tax break for driving all over town to meet clients.) Even the cost of going out to dinner is considered a business expense and therefore a deduction.
In addition, a recent change in the tax law now allows the self-employed to
claim up to $19,000 for equipment costs, instead of deducting only a fraction of that amount over time.
"The first thing I tell my clients is go out an buy something," Linton said.
But don't expect to claim those deductions without some kind of receipt.
Those in business for themselves must prove their expenses and income, because trying to deduct a $200 meal at a trendy, French bistro without a receipt could land them in the middle of an audit.
