Tax Tips

Tax Breaks for the Self-Employed

Know what forms to file and what strategies will save you money.

By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance

February 23, 2009

Whether you are a self-employed business owner or someone who dabbles as a freelance consultant on the side to pick up extra income, there are some special rules you need to know about filing your income taxes.

Forms: In addition to your 1040 Form, you'll need to submit a Schedule C, or the shorter Schedule C-EZ if you have business expense of $5,000 or less and have no employees and no home-office deduction. If your net earnings are more than $400 for the year, you'll also need to file Schedule SE to figure your self-employment taxes, which fund Social Security and Medicare. Self-employed people are responsible for both the employer's and the employee's share of Social Security and Medicare taxes -- totaling 15.3% of their net self-employment income. (People who are employed by someone else only pay the 7.65% employee share.)

And, you should receive 1099 forms from clients reporting how much they paid you in 2008.

Deductions. Because self-employed folks are hit so much harder at tax time, any expenses you can deduct can make a big difference. You'll be able to write off many of your business expenses, including the cost of a computer, printer, fax machine and copier, as well as work-related phone calls and mailings, office supplies, copying, advertising and business travel. Half of the self-employment tax you pay is also deductible.

Your health-insurance premiums may be deductible if you aren't eligible for health insurance from an employer or your spouse's employer, but you can’t deduct more than the net income of your business. Ditto for long-term care insurance premiums, up to the annual limits set for your age group.

If you have a home office that you use regularly and exclusively for business, you may be able to write off a proportionate amount of your home expenses including homeowners insurance, utilities, rent or mortgage interest. Plus, you can deduct all the direct costs associated with your home office such painting and furnishing.

Retirement savings. You can lower your tax bill by making tax-deductible contributions to a retirement plan for self-employed individuals such as a SEP-IRA or solo 401(k) that allow you to contribute up to $46,000 for 2008 (plus an additional $5,000 in catch-up contributions to a solo 401(k) if you are 50 or older.) While you must have set up your solo 401(k) for 2008 by last December 31, you still have until April 15 to set up and fund a SEP-IRA.

For details, see Publication 334, Tax Guide for Small Businesses at IRS.gov.

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