Paying estimated taxes critical for self-employed
Contract workers, consultants, freelancers or the self-employed face additional challenges when it comes to taxes.
Did you have to purchase a printer to produce invoices? That, too, can be deductible, as well as the paper and toner that you've used.
Did you use your car for work other than commuting, to see a customer or to go to that business meal, for example? The IRS mileage rate for 2012 is 55.5 cents for each business mile driven.
“Make sure you know where those deductions are because there are a lot of them,” Steber said.
To be deductible, a business expense has to be both ordinary and necessary, according to the “Ernst & Young Tax Guide 2013.”
“An ordinary expense is one that is common and accepted in your field of business, trade or profession,” the guide says. “A necessary expense is one that is helpful and appropriate for your trade, business or profession.”
Some education expenses may be deductible.
What you can't deduct: regular commuting costs or personal expenses unrelated to the business.
Business-related deductions are more advantageous because they directly reduce income, thus lessening the amount of taxes owed, said Greg Rosica, tax partner at Ernst & Young. Traditional W-2 employees can deduct unreimbursed business expenses only if they total more than 2 percent of income.
As W-2 employees can pay for health insurance with pretax dollars, self-employed individuals similarly can reduce income by the cost of their health insurance. The same goes for contributions to a qualified retirement plan.
Good record keeping is critical.
“In order to deduct your business expenses, you have to keep good books and records,” Weltman said. “It's mandatory.”
“Where there's complexity, there's opportunity,” Steber said.
“You can take advantage of it, help yourself from a tax position.”