If you launched your own business last year, or took on a little extra work to pad your paycheck, let me introduce you to the Schedule C and its sister form Schedule SE, the forms most freelancers need to file with their 1040s.
First of all, expect to dedicate a lot more time to completing your income tax forms. The IRS says the average taxpayer will spend more than ten hours working on the schedule C, including nearly two hours learning about it.
Well, here's the short course, a rundown of the paperwork you'll need and a few tips to help lower your tax bill.
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Which Forms to File
When you file your income taxes, you'll need to submit Schedule C in addition to your 1040. You can use the shorter Schedule C-EZ form if you have business expenses of $5,000 or less, have no employees and no home office deduction.
If your net earnings are more than $400 for the year, you need to file Schedule SE to figure your self-employment tax, which includes social security and medicare taxes.
You should receive 1099s from clients reporting your 2008 income. That's where you'll find all of the information you'll need to complete these tax forms.
For more information, see Filing Requirements for Self-Employed Individuals on the IRS Web site and Publication 334, Tax Guide for Small Businesses.
What You Can Write Off
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.) 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 the expenses from your freelance business, including the cost of a computer, printer and other equipment you use in your work.
Work-related phone calls and mailings, office supplies, copying, advertising, business travel and other expenses are also deductible.
You may also be able to deduct your health insurance premiums if you aren't eligible for health insurance from an employer or your spouse's employer (you can't deduct more than the net income of your business).
Half of the self-employment tax you pay is also deductible.
See our Taxopedia on Deductible Business Expenses for quick check list. For more details, see IRS Publication 535, Business Expenses.
You may also be able to write off the business use of your home, including a portion of your homeowners insurance, utilities, rent or mortgage interest -- which is more valuable as a business deduction than an itemized deduction. The amount of these deductions is based on the percentage of your home or apartment used for your business. See IRS Publication 587, Business Use of Your Home, for more information about the rules.
Save for Retirement
You can also lower your tax bill by making a tax-deductible contribution to a self-employed retirement plan.
You can deduct the contribution now and the money grows tax-deferred until you retire.
You generally have several choices, but if you didn't open up an account by the end of the calendar year, you only have one choice available now: a Simplified Employee Pension.
SEPs work a lot like IRAs and are available at most brokerage firms and mutual fund companies. You have until April 15, 2009, to establish your 2008 account and contribute the money.
Get Ready for Next Year
If you continue to earn self-employment income this year and aren't having any taxes withheld from your checks, you may need to make tax payments by sending the IRS form 1040-ES each quarter. Otherwise, you could end up with a penalty for late payments.
You should generally pay quarterly taxes if you'll owe more than $1,000 when you file your return. If you or your spouse has another job, you can increase your withholding to cover the extra income rather than bothering with quarterly payments. For more information, see the IRS's page on Paying Estimated Taxes. Use Form 1040-ES to figure and pay the tax.
Keep in mind that the first quarterly payment for 2009 self-employed income is due on April 15, with a separate form and address from your regular 2008 income taxes.
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