Keeping Track of Your At-Home Business Expenses

By Jan K., The Proofer

This is one of several articles that are geared toward the new at-home worker who needs help with self-employment taxes: the forms needed and how (and when) to file. This article will assist you in not only recognizing what are �business expenses,� but also how to track them so that filing your self-employment income will be a snap! You don�t need to know any accounting in order to record your business expenses---all you need is a good old, ordinary file folder and a pencil.

Keeping Track of Your At-Home Business Expenses

If you are new to working at home, then you might not be aware that you can legally deduct many types of valid business expenses, such as paper supplies or the second phone line you install for your business, on your self-employment income tax return (and thereby reduce your taxable self-employment income). This article concerns only general expenses and will not deal with how to determine and deduct expenses that relate to your in-home office space or depreciable office furnishings/equipment. That is a conversation for another day (and will be covered in a future article).

First, let me congratulate you on the fact that you are working at home! Whether it is part-time, full-time, or just a little something you do on the side for extra money, working at home and being your own boss is the lifelong dream of many people. Be proud that you have achieved what so many do not.

Second, let me be very clear that this article is written on the assumption that you report your self-employment income---all your income---and that you pay the self-employment taxes that are due on that income. This article is also based on tracking and recording legitimate business expenses. Even if you have very modest income and are using your kitchen table a few nights a week as your office space, there are still legitimate business expenses that you can use to help reduce your self-employment taxable income. The purpose of this article is not to help you find ways to pad your deductions or to dodge paying your taxes.

Last, this article is aimed at those who are either new to working at home or who need a simple explanation of a subject that may seem twisted and tangled. Business expenses and tax deductions don"t need to be scary monsters that live with the dust bunnies beneath the box spring of your bed. You don"t even need a complicated method of data storage in order to track your expenses and have quick and easy numbers ready when it comes time to file your taxes. In fact, you don"t really need much more than a notepad and a nice box. Of course, if you live for spreadsheets and bar graphs, you can get as high-tech as you like. Personally, I have a very simple Excel spreadsheet and four large file folders (one for each quarter of the year).

OK, let"s get started.

It is important to know what qualifies as a "business expense." Well, that"s simple. A business expense is money that you pay out of your pocket in order to maintain your at-home business. An easy example would be a business phone line. If you had a second phone line installed as your business line, then you can legally deduct 100% of the cost of that phone line as a business expense. You can also deduct the cost of equipment, installation, and hook-up (for the tax year during which you installed the line). Business expenses do not have to be related to office equipment or furniture, or even the actual work that you do. Legitimate business expenses also include office supplies like computer paper, ink cartridges, pens, notepads, paperclips---literally anything that you buy specifically for conducting your business.

I use this rule of thumb: If I wouldn"t have purchased it otherwise, then it is a business expense.

Now, I do understand that at some time during your life, you would probably have some reason to pick up a package of paperclips or buy a couple of ink pens. What I"m talking about are the things that you find that you use regularly in the course of your business. As an example, I have two clients for whom I