Making Taxes Your Business

It must be used exclusively for business. That means it can't be a room that's half laundry room, half office. It must be all office, all the time.

(Note that you could qualify for the home office deduction if the office is needed for the convenience of your employer, but that's fodder for a different day.)

To determine your actual home office deduction, you need to calculate the amount of space your office occupies in your home.

If you know the square footage of your office and your house, that's the best way to come up with an accurate percentage. If you don't and the rooms in your home are about the same size, you can compare the total number of rooms used for business with the total rooms in the house. So if you have 10 rooms and your office is one of them, then your office represents 10% of your home.

Once you have a percentage, then you can apply it to the expenses you pay to maintain your home. So include a percentage of your utilities, cleaning services and mortgage interest if you own the home. The same goes for rent, if you rent the joint.

Know that you can't deduct home office expenses if your business is not making money, says Martin Nissenbaum, national director of income tax planning at Ernst & Young. You need income to take this deduction.

Check out the IRS' Publication 587 -- Business Use of Your Home. It's actually pretty helpful.

Take It to Form 1040

Once Schedule C is complete, hop over to the first page of your Form 1040. There are a few lines devoted to self-employed folks.

Remember, if your net earnings are $400 or more, you must pay self-employment tax on that money. Self-employment tax is basically like the Social Security and Medicare taxes, a.k.a. FICA taxes, that are withheld from an employee's paycheck. An employee pays half of the FICA taxes that are due to Uncle Sam, and the employer pays the other half. Since you are both the employer and employee, you pay all of it. So Uncle Sam allows you to deduct one-half of that tax on line 30 of your 1040.

You may also deduct the health insurance premiums you paid for yourself, spouse and dependents on line 31.

And don't forget about your retirement contributions. Some of those contributions are deductible on line 32. There are a ton of retirement options out there for self-employed folks these days. So for all the juicy details, be sure to read IRS Publication 560 -- Retirement Plans for Small Business.

So as you enter tax season, remind yourself how great it is to be your own boss (in your fuzzy slippers, of course). It will make preparing your tax return much less painful.

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