Making Taxes Your Business

Ah, the joys of being self-employed.

You call the shots, and if you work from home, you get to wear your fuzzy slippers to work. (I have mine on!)

The downside is that you no longer get paid for sick days, and you now have much more work to do come tax time. For instance, you now have to file Schedule C -- Profit or Loss from Business. It's the form that tells Uncle Sam how your business did last year, and it can get pretty confusing.

Even worse, it's a pretty big red flag for the IRS. Mainly because people who own cash-based businesses, such as restaurants or bars, have plenty of opportunity to under-report their income.

But don't be afraid of it. If you report everything honestly and accurately, and have documents to cover it all, you should have nothing to worry about if Uncle Sam ever does come knocking.

Show Me the Money

The first thing you have to do is total your income. When you're self-employed, any cash you receive is your income or gross profit.

If you do consulting or freelance work, your gross profit is pretty straightforward. It's basically the money you received for the work you did. You should have received a Form 1099MISC -- Miscellaneous Income, showing all amounts earned over $600. If for some reason you never got a form from one of the jobs you did in 2004, report that income anyway. If you're ever audited, Uncle Sam will see the money going into your checking account and wonder why it wasn't reported on your tax return. Then you'll get smacked with back taxes, interest and penalties to boot.

If you sell a product, then the sales price, less the cost of goods sold, is your gross profit.

"Cost of goods sold" is accounting-speak for the materials, labor and overhead used to make your product. Part III of Schedule C helps you tally all these costs. Big note: Line 37 of the form asks for the "cost of labor" in making your product. If you are the only one making it, your cost of labor is zero. You can't charge Uncle Sam for your own time.

Your Business Expenses

The upside to being self-employed is that you can write off a ton of things with very few limitations. So start tallying all ordinary and necessary expenses incurred in connection with your business.