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Tax Rules and Write-Offs for the Self-Employed
I work as a freelancer and keep track of all my expenses. What forms do I need to file with my income taxes and what can I deduct?
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
April 14, 2004
I work for a promotion company as a freelancer and keep track of all my expenses. What forms do I need to file with my income taxes and what can I deduct?
If you have any self-employed income -- even if you also have a full-time job somewhere else -- you need to file a Schedule C, Profit or Loss From Business (you can use the short form, Schedule C-EZ, if you had business expenses of $2,500 or less, had no employees, and aren't taking the home office deduction).
You'll also have to file Schedule SE if you had net business earnings of $400 or more (the form has a helpful flow chart that shows whether you need to submit the long or short version). This is where you calculate how much you owe in medicare and social security taxes.
Since taxes usually aren't withheld from self-employed paychecks, you may need to file quarterly taxes, too. See Estimated Tax for Individuals for more information.
Because your self-employment income is taxed at a higher rate than the rest of your income, it really pays to take advantage of as many deductions as possible. You'll be able to write off many of the expenses for your freelance business, including the cost of a computer and other equipment you use in your freelance work, phone calls, mailings, advertising, business travel, and a slew of other expenses.
You may also be able to deduct your health insurance premiums if you aren't eligible for health insurance from any other employer or your spouse's employer (although you can't deduct more than the net income of your business). And you might be able to deduct your home office expenses if you do your freelance work from an office in your house. See Home Office Deductions Are Worth the Hassle and IRS Publication 587, Business Use of Your Home, to figure out whether or not you qualify.
You'll also be able to deduct contributions to any small-business retirement plan you set up, which lowers your taxable income and lets the money grow tax-deferred until retirement. See Do-It-Yourself Retirement Plans for your options.
For more information about taxes for self-employed people, see the IRS's information page for Self-Employed Businesses and Independent Contractors and Publication 334, Tax Guide for Small Business.
