How to File Taxes When You Work for Yourself

Fortunately, deducting business expenses can help you reduce your self-employment tax.

Try to take advantage of as many legal deductions as you can. In particular, look to make full use of deductions for business expenses and retirement plan contributions.

Deducts Operating Expenses

Make sure to deduct normal operating expenses such as:

• Business travel in your personal vehicle (either by deducting the operating and maintenance expenses of the car based on the proportion that you used it for business travel or by taking the standard mileage deduction of 48.5 cents per mile for 2007).

• Membership fees for trade associations.

• Fees associated with accounting and tax preparation for your business.

• Ordinary office supplies, such as paper, printer ink, envelopes and office postage.

• A phone line used solely for business.

• Money paid to any subcontractors.

If an expense was essential to the running of your business, deduct it -- provided you can prove it is essential if the IRS starts asking questions. For instance, claiming your new scanner as a business expense for your graphics company is fine, but claiming that a new 64-inch plasma TV was essential for your accounting business might be a tough sell in an audit.

If you work at home, the home office deduction can provide significant financial benefits. The deduction allows you to claim a percentage of your household expenses -- such as utilities, rent, mortgage interest payments, real estate taxes and home improvements -- as business expenses.

Contribute to Retirement Savings

With 2007 long gone, your ability to generate deductions for that tax year is limited. That said, you can still make a deductible contribution to a retirement savings plan until your final deadline for filing your taxes (if you file for an extension, you have until October 2008).

Contributions to qualified retirement accounts such as SEP IRAs are tax-deductible. If you pay a total of 30% in state and federal taxes, a $5,000 contribution to a SEP IRA or other qualified account will reduce your tax bill by $1,500 -- on top of the value of putting the money aside for retirement. (Remember that contributions to Roth IRAs are not deductible.)

For tax year 2007, self-employed taxpayers may contribute the smaller of 25% of total earnings or $45,000 to a SEP IRA. (Check out IRS Publication 560 for details.)

If you haven't set up a retirement plan, you have until April 15 to do so (or October if you've filed for an extension). Most plans are simple to set up. You can ask a financial adviser for assistance, or do it yourself at nearly any major financial institution's Web site.