Self-employed people have special rules. You cannot claim self-employment income or losses if your ‘occupation’ is really a hobby. There are IRS rules that define the difference.
You are required to report ALL of your income from self-employment, this includes bartering. We are not required to see records of your income, but if IRS audits you, records must be presented that show your income proofs. We will ask about your record keeping system and would prefer to see it. The record keeping systems vary with each occupation. As a general rule, having a log showing when you got the income, from who it came, how much you got and what work was performed, is acceptable.
You are allowed to take any and every expense that is related to creating your income. However, you are required to have receipts for every expense. We are not required to see your receipts, but IRS will require you to produce them if you are audited. Some expenses are not written off during the year you bought them and may have to be written off over a period of years, this is called depreciation. Travel, entertainment and meal expenses have very special rules. Auto mileage records must be kept separately and logged as to dates, distances, places travelled to and what it was for.
If you run your business out of your home (or apartment) and have an area that is used only for your business, there may be deductions that you can take for ‘Business use of your Home’. To claim business use of your home, you need the square footage of your work area and the square footage of your whole house (or apartment). Items that are allowable to calculate the deduction include home insurance, taxes, interest, repairs, maintenance, utilities and some other household expenses.
There is a time limit for how long records should be kept. However, if IRS feels that fraud was committed, there is no limit as to how far they can go back. Under any circumstances, all records should be kept for a minimum of three years after the due date, or actual filing date of the tax return, whichever is later. We recommend that you keep your records for a minimum of 7 years.
You do not need a separate bank account for your business, but not having a separate bank account requires the need of a good bookkeeping system.
Showing continual losses for two or more years may alert IRS to audit your records.
When you have a profit you will pay income taxes on the profit as well as a self-employment tax. The Self-Employment tax is your contribution to the Social Security fund.
On this website we have the kinds of expenses you are allowed to take for several different self-employed occupations.
The lists are not necessarily all inclusive, so if you have a questionable item, be sure to mention it.
Click on the following occupations to get an idea of the kind of expenses that can be allowed. Print the page and make
notes next to each item as to the amount spent.
