Tax Tips for Self-Employed Filers

CHICAGO ( TheStreet) -- No one looks forward to tax season, but it can be an especially stressful time for the self-employed. The paperwork can be daunting, and there's no in-house accounting department to turn to for advice.

Adding to the anxiety is the notion that one unintentional error could bring the misery of an Internal Revenue Service audit. Before you sit down to prepare your filing, check your knowledge of common tax questions self-employed filers face:

True or false: Anyone who runs their own business from home is more likely to get audited.

True. "Both high-income and self-employed individuals, in general, are audited more frequently," says Genevia Gee Fulbright, president of Fulbright & Fulbright, CPA, PA, in Durham, N.C., and author of Make the Leap: Shift from Corporate Worker to Entrepreneur and Make the Leap: From Mom & Pop to Good Enough to Sell.

In part, that's because someone working from home may have income from a variety of sources (rather than a single employer), with more potential for discrepancies in what is reported as income. "The self-employed typically tend to generate higher incomes and therefore potentially might have deductions, flow-through entities or tax shelters that require additional scrutiny," she says.

True or false: You can deduct the cost of a home computer as long as it's used for business.

False. If your home computer is being used for both work and personal tasks, you have to document the percentage of time it is used for each purpose, then deduct expenses accordingly. That means keeping a daily log of business versus personal usage -- not the most practical option for most of us.

"Since the price of computers and PDAs are so low and allow access to the Internet as well as other functions, the best practice is to maintain a computer that you use strictly for business," says Fulbright.

True or false: Your home office must be a separate room to qualify for a deduction.

False. However, it must be a clearly demarcated area that is dedicated solely to business use. "The general rule is that it must be a part of the home used exclusively and regularly as a principal place of business," says Fulbright. A desk in the corner of the family room doesn't count; a desk closed off from the rest of the room by bookshelves or filing cabinets would. Fulbright recommends the IRS publication 587, Business Use of Your Home as a helpful resource.

True or false: It's worth keeping track of every potential deduction, no matter how small.

True. No one wants to be buried in paperwork, but here's one place where attention to detail can pay off. Monica Rebella, an accountant at Rebella Accountancy in Tustin, Calif., saw this first-hand recently while working with a self-employed client who transcribes court documents.

"She didn't think taking expenses against her little business would make a difference, and I had to really work on her to give me expenses," Rebella says. By documenting and tallying all the woman's supplies, meals with her contacts, mileage, and home office and computer expenses, she saved her client more than $15,000 in taxes.

True or false: Being self-employed means you have very limited retirement account options.

False. While you give up the potential for an employer 401(k) match when you work for yourself, you do get access to other retirement plans. Joseph Kovar, an accountant at Sweeney Kovar in Danville, Calif., steers clients toward the solo 401(k). "It's not well known, but it allows self-employed taxpayers to contribute substantially more than they can with a SEP or regular 401(k)," he says

True or false: You should live in mortal fear of an audit.

False. Being audited is no fun. But if you're honest and upfront on your tax return, you'll probably never go through one. According to the most recent numbers released by the IRS, about 1 million tax returns were examined during the 2007 fiscal year. That was only 1% of all returns.

-- Reported by Elizabeth Blackwell in Chicago.
Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook, and writes for the Wall Street Journal, Chicago, and other national magazines.