Paying estimated taxes critical for self-employed

Published on NewsOK Modified: January 22, 2013 at 8:37 pm •  Published: January 22, 2013
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"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."

If you use some items, say a computer, for both personal and business purposes, you'll have to track the time and usage to determine how much can be deducted. "Have that stuff contemporaneously documented along the way, not the day you get the letter from the IRS," suggested Greg Rosica, tax partner at Ernst & Young.

Some education expenses may be deductible, as well.

What you can't deduct: regular commuting costs or personal expenses unrelated to the business.

Business-related deductions are more advantageous for a self-employed taxpayer because they directly reduce income, thus lessening the amount of taxes owed, said Rosica. 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 pre-tax 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 recordkeeping is critical.

"In order to deduct your business expenses, you have to keep good books and records," Weltman said. "It's mandatory."

If you're self-employed, you'll have to file Schedule C, Profit or Loss From Business, to report your business income, and Schedule SE to compute your self-employment tax, along with your 1040 form. There's also a separate form, 8829, if you use your home for business purposes.

"If you use an extra bedroom to run your online business, you can take a home office deduction for the extra bedroom," the IRS says as an example. For the 2010 tax year, more than 3 million taxpayers claimed the deduction, according to the agency.

But the IRS says claiming the deduction often can often involve "complex calculations of allocated expenses, depreciation and carryovers of unused deductions."

So beginning with the 2013 tax year, taxpayers will have a simpler option for computing the deduction: $5 per square foot of space used, up to $1,500.

Sound confusing?

"Where there's complexity, there's opportunity," Steber said. "You can take advantage of it, help yourself from a tax position."