There are more benefits to being self-employed than just being your own boss. You may qualify for valuable tax deductions as well, according to the Pennsylvania Institute of Certified Public Accountants.
• The expensing deduction. There's a special tax break available to business owners called Section 179 expensing. Through it, you can write off up to $105,000 of the cost for new or used qualifying business property in 2005, instead of depreciating the expense over several years. This includes new computer hardware and off-the-shelf software. To qualify, the equipment must be put into service by Dec. 31.
• Contribute to a retirement account. Whether you choose an Individual Retirement Account, Keogh or a Simplified Employee Pension plan, saving for retirement is one of the best ways to lower your overall tax bill. Money invested in retirement accounts accumulates faster than funds in other investments because earnings grow tax-deferred until withdrawn.
• Deduct health insurance. In 2005, as a self-employed worker, you can deduct up to 100 percent of the premiums paid for health insurance for you, your spouse, and your dependents.
• The home office deduction. Your home office may qualify as your principal place of business if it meets the following criteria: It is used exclusively and regularly as a place of business to meet clients, patients or customers in the normal course of your business - or for administrative or management activities - and you have no other fixed locations where you conduct substantial administrative or management activities. Self-employed workers who qualify can also deduct a proportionate share of certain costs, including mortgage interest or rent, depreciation, real estate taxes, repairs, utilities and homeowner's insurance, as well as direct costs like office furnishings.
• Keep track of automobile expenses. There are two methods for deducting business-related automobile expenses: You can keep track of the business miles you drive and multiply your total for the year by the IRS 2005 standard mileage rate of 40.5 cents per mile, plus parking fees and tolls. Or you may deduct the business portion of the actual expenses incurred for gas, oil, insurance, repairs, tolls, parking, and license and registration fees.
• Hire your children. A simple tax-saving strategy is to hire your child. You get a business deduction for the wages paid and, if your business is unincorporated, you owe no Social Security or employment taxes on the amount you pay to a child under age 18. Just keep good records and be sure the work done by the child is sincere and legitimate.
• Deduct expenses. Self-employed individuals are able to write off many business-related expenses. Deductible business expenses include stationery and office supplies, postage, Internet access, advertising and even subscriptions to professional journals. For qualified business travel, you can deduct 100 percent of transportation and lodging expenses, and 50 percent of meals and entertainment.
• Pay estimated taxes during the year. Since your clients don't withhold taxes when they pay you, you, too, must make estimated quarterly tax payments if your estimated tax liability is $1,000 or more. To avoid underpayment penalties, make estimated payments that total at least 90 percent of what you expect to owe for 2005. Another option is to make estimated payments - and withholding, if applicable - equal to 100 percent of your 2004 tax, or 110 percent if your adjusted gross income in 2004 was more than $150,000 and you filed jointly.
Payments are generally due on April 15, June 15, Sept. 15 and Jan. 15.