One of the most important obligations for the self-employed is to pay estimated taxes during the year. Unlike a traditional employment situation where the employer withholds taxes from an employee’s paycheck during each pay period, the self-employed must make their own withholdings. These withheld amounts are typically paid quarterly and must be paid both to the federal government and the state government.

When estimating these quarterly payments, the self-employed should keep two important considerations in mind. First, the taxpayer should estimate the tax rate not on the amount of the quarterly earnings, but on the projected annual amount of earnings. For the self-employed taxpayer with a growing business, this may mean using a higher tax rate, even on earlier, smaller earnings. A self-employed taxpayer whose income fluctuates seasonally–for example, a tax preparer whose business peaks between January and April–might use a lower tax rate during the busy season to offset lower earnings later in the year.

Second, the self-employed must be mindful of the separate, self-employment tax. The self-employment tax, which is approximately 15% of earnings, represents Medicare and Social Security payments. If this additional tax is not withheld by the self-employed, it could result in a serious shortfall at the end of the tax year. Where a significant shortfall occurs, the IRS, and the state, can impose penalties and interest on the amount underpaid.

Many self-employed persons work from home or use a personal vehicle, which leads to another area of frequent tax problems: home office and personal automobile deductions. A taxpayer may deduct as a business expense the pro-rated portion of their rent or mortgage payment, and utilities payments, which represents the area used for the home office. The home office, however, must be used exclusively for the business. Physically separating the area, such as using a specific room, is best for this. Also, if a personal vehicle is used for the business, the taxpayer must be sure to keep mileage records for the business use. Only the business miles can be deducted.

Thanks to the convenience of the web, more and more small business owners are finding it easy to work from home offices. As you may know, small business owners can take advantage of a set of tax deductions relating to business expenses. However, when it comes to making deductions for expenses relating to your home office, things can get tricky. The deductions are definitely available, but you may have to take certain steps to make sure that you can get them legally.

A space devoted to work
First of all, in order to be able to claim deductions for many aspects of your this type of office, you need to have a space that is devoted exclusively to your business. And when the tax code says exclusively, the IRS really means it. If your office at home doubles as a living room, dining room, or bedroom, or if it is used for sleeping, watching TV, or anything else, then it does not qualify for deductions.

Of course, getting over this hurdle is not difficult. Even if you place your office in a room that is devoted to other purposes, you can set aside a square of space that is exclusively for work. Once you do so, you’ll want to measure out the dimensions of your work area so that you can properly claim your deductions.

Your principle place of business
Second, it’s important that your office at home serve as your principle place of business. If you use your home office for a few occasional tasks to supplement your primary work, which is out of the home, then you don’t qualify for deductions. However, if your home office is the place from which all your business activities are based, then you do qualify. This is simple for a lot of people, but if you have an external office, things can get complicated.

Deductions
So, now that we’ve established which home offices are eligible for deductions, what can you deduct?

· All expenses relating directly to your home office: This includes expenses relating to painting, cleaning, remodeling, etc.

· Electric and phone bills for your home office: If you use your phone for non-business purposes, then it doesn’t qualify. With your electricity, calculate the percentage of your home’s square footage that your office takes up, calculate that percentage of your monthly bill, add it up for the year, and deduct that amount.

· Rent or house payments: As with the electric bill, you’ll need to know the percentage of your home’s space that your office takes up. Apply that ratio to your rent or house payments, and deduct that much for the year. If there are any rooms that are primarily used in relation to your home office (for example, an adjacent bathroom or a closet), don’t forget to enter these into the calculations.

· Fees relating to your business: Depending upon what type of business you’re involved in, you may have to pay fees to various entities. For example, if you’re a freelancer, you may have to pay fees to the service that connects you to clients. These can be deducted.