Free Tax Money from the IRS from a Home Business

Aren't many people today looking for that extra cash? They're looking for an extra income to supplement whatever money they have. Because the United States is very business friendly, the IRS tax system is geared to help all business owners. That includes the millions of people working at home on some kind of income generating business. The dream of being self-employed has many tax advantages. Don't overlook the fact that your business can be very modest in terms of income produced. As long as your goal is income, you are considered a business owner.

A major advantage of self-employment is the SEP or Simplified Employee Pension. You can put away lots of tax-deductible money into this plan. In 2007, you can stash up to $45,000, and if you're over 50, you can put an additional $5,000 in "catch-up" contributions to a 401(K) plan but not the SEP. Do I hear happy, wealthy retirement in the background?

All self-employed people are taxed only on their profits. The good news about this is there are lots of deductions you can take as a self-employed home business owner. Whatever you've spent on home office supplies and inventory is deductible along with other business expenses: accounting software, a portion of your computer and printer, advertising, and one half of business-entertainment costs. Because you use a portion of you home as your office, you get to write off the business portion of your house overhead like utilities and insurance.

The IRS allows you 44.5 cents per mile deduction for business use of your car. In addition, you can write off parking fees and tolls and the business portion of interest on a car loan.

Regardless of your self-employment income, this includes freelance work on the side; you'll need to report this to the Internal Revenue Service (IRS). You use Schedule C. This form allows you to list not only your income, but all of your deductions of which you'll have plenty. Just like a salaried employee, you only pay tax on Gross income minus deductions which equals net income. If you have less than $5,000 in business expenses, don't carry an inventory, and don't show a net loss, you can file the simpler Schedule C-EZ. It's not all good news. There is a self-employment tax used to fund Social Security and Medicare so you'll have to file Schedule SE. The total tax here is 15.3% of your net earnings. The good news about this...one half of that is deductible.

As always, good records are essential. You'll need to prove to the IRS that you're running a legitimate business and not a hobby. A rule of thumb is if you lose money, gross income minus deductions, in three out of five years, the IRS would consider that a hobby and not a business. Make sure you show a profit by year three.

Because I am not an accountant, please consult one as they may have even more deductions for your Home Business. I have been pleasantly surprised at the tax money given to me by the IRS because of my self-employment.

Internal Revenue Service