Generally, you are self employed if you:
- Operate as an independent contractor
- Are the sole proprietor of a business or you practice a trade
- In some way or another are in business for yourself
Things to know if you are self-employed:
- If you and your spouse operate a business together and file a joint return, both of you may be able to be treated as sole proprietors instead of as a partnership. Each spouse would report their share of income and expenses as a self-employed individual on the appropriate form (for example, Schedule C or Schedule F).
- Up to 100% of medical insurance costs you pay by for yourself, your spouse, and your dependents may be deductible as an adjustment to income on Form 1040, U.S. Individual Income Tax Return. The deduction is subtracted directly from your total income and applies whether or not you itemize.
- If you are self-employed and covered by a high-deductible health insurance plan, you may be able to establish a medical savings account (MSA). An MSA is a tax-exempt trust or custodial account that you set up with a U.S. financial institution (such as a bank or an insurance company) in which you can save money exclusively for future medical expenses. The distributions from MSAs are tax free if they are used for qualified medical expenses.
- If you use your vehicle for business purposes, you may be able to deduct expenses associated with such use. To do this, you must keep track of actual expenses or use the standard mileage rate.
- You may be entitled to a tax break if you are operating a business from your home. The following questions will help you determine whether you can deduct the business use of your home
- Is this part of your home used regularly and exclusively in conjunction with your business or work?
- Is this your primary place of business?
- Is this where customers and clients meet with you?
- Is this where you store product samples?
- Is this where you administer or manage your trade or business?
If you answer yes to any of these questions, you may be able to deduct certain depreciation and operating expenses for the business use of your home. The same tax benefits may apply if you maintain a separate structure for your business.
- You may recover your investment in certain business-related properties (such as equipment, a vehicle, or a building) through the use of depreciation. In this manner, you deduct some of your cost on each year's return. If you do not claim the depreciation, and later sell the property, the IRS calculates the basis as though you had taken the deduction each year. If you have unclaimed or have underclaimed depreciation deductions on property placed in service in prior years, you may be able to fully recover all allowable depreciation in the current year.
- Up to $250,000 (for tax-year 2008) of certain tangible business property may be deducted in the year it was put in service (as a section 179 deduction) rather than using the depreciation method (section 179 expensing).
- Your employees' wages and salaries are deductible if they are paid during the tax year for work directly related to your business and the pay is reasonable. You must be able to verify that the payments were made for duties actually performed. There are various types of withholding for different types of employees. Specific forms must be used for reporting payments made to employees.
- You may be able to deduct expenses for a leased asset (such as a car or computer) used in your business. If it is not used solely for business purposes, you may deduct only the percentage of use that applies to your business or work.
- Business tax credits can reduce your tax liability. There is a credit for providing access to the disabled and a work opportunity credit for providing work for members of groups with special employment needs or higher unemployment rates.
- If you are a freelancer writer, photographer, etc., you may qualify to use Schedule C, Profit or Loss from Business, as a self-employed individual and report your deductible business expenses on that form. If you took these deductions on Schedule A as an employee, they would be subject to a 2% of adjusted gross income limit.
- Costs that you incur while setting up an active trade or business, investigating the possibility of creating or acquiring a business, and some legal fees are business start-up costs. You can choose to deduct up to $5,000 of business start-up costs with the remainder amortized over 15 years. Franchise fees, goodwill, and customer-based intangibles are also amortizable.
- If you use an accrual-basis method of accounting and you have been unable to collect money owed to you or your trade or business, you may be able to deduct that debt, provided you have a tax basis in the debt. If you use the cash method of accounting, you generally cannot deduct a bad debt because you do not report income until you receive a payment.
You should also consider the following questions before you begin preparing your tax return:
- How much Social Security and Medicare taxes, FUTA taxes, and workers' compensation insurance will you pay?
- Will you have more than one trade or business?
- What if your attempt to operate a business fails?
- Should your financial calculations be based on a calendar year or a fiscal year?