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.

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.

It will make tax time a much less stressful experience for the home business owner. Do not overlook the small things. This can be as simple as keeping the receipts when you purchase paper, staples, or toner. Any item that is purchased for your home business is usually considered a tax deduction. This may seem tedious and unimportant but nothing could be further from the truth. You might be amazed when all these little things add up at the end of the year.

Home business deductions can be separated into two categories. The first is for Direct Expenses. These are expenses that are needed for your actual home office. Direct expenses include office furniture, decorating costs, or equipment. Indirect Expenses are the expenses that must be paid the entire house. This includes heating, electricity, or mortgage interest payments. You can deduct the percentage of your business expenses from your utility costs. Another tax deduction to consider is telephone expenses. If you have one telephone line, the IRS is usually not going to believe that you use this only for your home business. The second phone line installed in your home is purely one hundred percent deductible. Another common deduction that is often missed is the lost distance charges incurred because of business calls.

Most home business owners use a vehicle as a means of transportation for their business. This vehicle can be used for running to the post office, or meeting with a client. Keep a log book in the vehicle to keep track of the mileage on these errands. Vehicles can be vital to run your home business, and overtime these kinds of charges can hurt your profits. There are many valuable tax deductions for vehicles, such as car repairs and car insurance. Airline fare can be another costly, but necessary aspect for home business owners. The IRS does allow your trip expense as another tax deduction.

Cash disbursements can be expensed or depreciated. Due to the judgment required to determine what should be capitalized, there is some discretion. For example, a local gang paints graffiti on a portion of the side of your building. You decide to repaint the entire side of the building instead of just the portion with graffiti. Is this a repair or should it be capitalized? Some owners would elect to expense repainting the entire building. Business owners should seek counsel from their advisor regarding discretionary tax deductions.

Real estate provides bountiful tax deductions for small business owners. Most real estate owners inadvertently understate depreciation and thus forego available tax deductions. The common practice is to simply separate land and long-life property. Real estate owners can typically increase depreciation by 50-100% in the first 5-7 years of ownership by utilizing cost segregation. Cost segregation can separate up to 130 items that can be depreciated over 5, 7, or 15 years. These short-life items typically comprise about 20-40% of the improvement cost basis. The increased depreciation increases tax deductions.

After a cost segregation study is prepared, the owner can “catch-up” previously under-reported depreciation. Another source of “hidden” tax deductions is a careful review of your fixed asset schedule. Many fixed asset schedule include items which should have been expensed or which have been discarded. Misclassified items are another source of additional tax deduction. In some cases the depreciation life for an asset has been overstated through clerical error. A fixed asset audit typically generates meaningful tax deductions.