Working from home opens up a lot of freedom in a self-employed individual’s schedule. They can knock out work in the early morning before the children get up or even late at night after the day has calmed down. They are their own boss and get to decide when and where to work.
While this freedom is enjoyable for many self-employed individuals, when it comes to paying taxes it can get complicated.
Many self-employed workers do not take all of their deductions they are owed. Whether they lack the knowledge of these deductions or do not know how to claim them on their taxes they are missing out on money that is owed to them. It is important to pay attention to what can be deducted and what cannot.
Someone who works in their home and uses the internet, a landline phone, or even general utilities can take a portion of these costs and deduct them on their taxes. Any travel expenses that are strictly for the job can be deducted as well. These include meetings or even costs for professional development classes. Remember to save receipts for any fees paid to be licensed, as well.
There have been some changes to how people may deduct items on their taxes. There is now a two percent rule that any deductions going over two percent of a person’s annual gross income is not deductible if they work for a corporation and work at home. This rule does not apply to someone who is only self-employed.
Some self-employed people do not choose to take any deductions and others take too many. Either side of the spectrum is not good. Those that take many deductions are going to cause red-flags to go up and are likely to be audited.
The expenses that are written off must be directly linked to the business. Extra expenses that do not have to do with the job but were purchased for an in-home office are not likely to be deducted. Always provide receipts for expenses and be ready to justify the deduction.
Many people think that if they work in their home they are able to deduct expenses for their home on their taxes. This is not, necessarily, true. Rent or mortgage payments are not always deductible, especially if there is no specific home office to claim.
The home office has to be only used for office purposes. An area that is also used for entertainment or personal business is not a home office. This includes sitting at a kitchen table or even on the couch with a laptop.
Those that have a home office but also work outside the home are not able to claim their home office either. The home office must be the primary way work is completed and where the person spends most of their time. If there are meetings with clients or coworkers held in the home, some expenses may be deducted.
Many self-employed workers do not use separate accounts for spending. They will use the same account to buy groceries to buy their office supplies. This makes it much harder to prove the purchases were for the office. Having a completely separate account will make it easier to prove spending was for the business and not for personal use.
Always keep a detailed record of spend and use of personal devices for work. If deducting internet usage or phone usage there must be a log of how much time is spent on these devices. Outline which calls were for business and which for personal use.
Even with a separate account, it is important to have receipts. These receipts will have each item that was purchased on them. A general statement from a credit card statement that shows how much money was spent at a store does not prove what items were bought. The receipts are the only proof that the IRS will consider.
Deducting items on a tax return is difficult for someone who is self-employed. Many people do not keep detailed records or receipts of their spending during their first few years of working at home. This makes it much more difficult to complete their taxes. Always keep detailed notes of spending, have separate accounts, and do not deduct items that are not considered business specific.