Self Employment

Generally, you are self-employed if you:

Things to know if you are self-employed:

Filing & Set-up Costs

If you and your spouse operate a business together and file a joint return, both of you may be able to be treated as sole proprietors instead of as a partnership. Each spouse would report their share of income and expenses as a self-employed individual on the appropriate form (for example, Schedule C or Schedule F).
Costs that you incur while setting up an active trade or business, investigating the possibility of creating or acquiring a business, and some legal fees are business start-up costs. You can choose to deduct up to $10,000 of business start-up costs with the remainder amortized over 15 years. Franchise fees, goodwill, and customer-based intangibles are also amortizable.
If you use an accrual-basis method of accounting and you have been unable to collect money owed to you or your trade or business, you may be able to deduct it. You must have previously included the money owed as income so you have a tax basis in the debt. If you use the cash method of accounting, you generally cannot deduct a bad debt because you do not report income until you receive a payment.

Up to 100% of medical insurance costs you pay by for yourself, your spouse, and your dependents may be deductible as an adjustment to income on Form 1040, U.S. Individual Income Tax Return. The deduction is subtracted directly from your total income and applies whether or not you itemize.
If you are self-employed and covered by a high-deductible health insurance plan, you may be able to establish a medical savings account (MSA). An MSA is a tax-exempt trust or custodial account that you set up with a U.S. financial institution (such as a bank or an insurance company) in which you can save money exclusively for future medical expenses. The distributions from MSAs are tax free if they are used for qualified medical expenses.

If you use your vehicle for business purposes, you may be able to deduct expenses associated with such use. You may choose the actual expense method or the standard mileage rate. If you choose the actual expense method, you must also keep track of your vehicle-relate expenses for the year. Vehicle related expenses include gas, oil, insurance, repairs, cleaning, registration, etc. The business portion of your personal property taxes and vehicle loan interest is also deductible. Whichever method you choose, you must keep track of the mileage on your car from the first day of the year or the first day you use your car for business through the end of the year.
You may be entitled to a tax break if you are operating a business from your home. The following questions will help you determine whether you can deduct the business use of your home:

Is this part of your home used regularly and exclusively in conjunction with your business or work?
Is this your primary place of business?
Is this where customers and clients meet with you?
Is this where you store product samples?
Is this where you administer or manage your trade or business?
If you answer yes to any of these questions, you may be able to deduct certain depreciation and operating expenses. The same might apply if you use a separate structure for your business, such as a shed.

You may recover your investment in certain business-related properties (such as equipment, a vehicle, or a building) through the use of depreciation. In this manner, you deduct some of your cost on each year's return. If you do not claim the depreciation, and later sell the property, the IRS calculates the basis as though you had taken the deduction each year. If you have unclaimed or have underclaimed depreciation deductions on property placed in service in prior years, you may be able to fully recover all allowable depreciation in the current year.
Up to $500,000 (for tax-year 2010) of certain tangible business property may be deducted in the year it was put in service (as a section 179 deduction) rather than using the depreciation method (section 179 expensing).
You may deduct the special depreciation of 50% of the basis of the assets you placed
You may be able to deduct expenses for a leased asset (such as a car or computer) used in your business. If it is not used solely for business purposes, you may deduct only the percentage of use that applies to your business or work.

Your employees' wages and salaries are deductible if they are paid during the tax year for work directly related to your business and the pay is reasonable. You must be able to verify that the payments were made for duties actually performed. There are various types of withholding for different types of employees. Specific forms must be used for reporting payments made to employees.
Business tax credits can reduce your tax liability. There is a credit for providing access to the disabled and a work opportunity credit for providing work for members of groups with special employment needs or higher unemployment rates. New in 2010, there is a credit for paying a specified amount of your employees' health insurance premium if you are a qualified small business. You many also carry-back any unused business credit for up to five (5) years .

There are some new credits and deductions for small business owners beginning in 2010.

Qualified real estate is eligible for the section 179 deduction. This includes rented business property improvements necessary for your business.
There is a new small business credit for employers who pay 50% or more of the qualified cost of health insurance.
Also new for 2010, businesses with excess business credits may be able to carry the excess credit back for up to five years.
Employers who hired individuals that were out of work for a minimum of the 60 days prior to starting may be eligible for a credit of up to $1,000 per qualified individual. The individual must be employed as a full-time worker for 52 consecutive weeks.

If you claim the self-employed health insurance deduction on Form 1040, you may generally reduce your income subject to self-employment taxes on Schedule SE.