Let me begin this hub by saying before you do anything with taxes make sure to talk to a professional in your area! Every state is different and even some cities are different so the things I will be writing here are relevant for the FL area, but I am not sure about nationally.

Personally I have been an independent contractor for the past 5+ years. This means that I qualify as a home based business under our statutes. That enables me to write off quite a bit. The easiest way to figure out if you can do this is if you are W2'd or if you receive 1099's. (Basically if the company takes out taxes then you are in a grey zone if you try to file this way and I would not recommend it unless your tax advisor tells you that you should.)

Now for the advantages, at the end of the year our accountant (I use H&R Block because they have the Peace of Mind for $30 if I get audited then they handle it for me) takes our 1099 income totals it up and then deducts all of my itemized items. The remainder is what is considered "taxable" income. So for simple math, if I make $50,000, and have $25,000 in deductions my taxable income is $25,000.

So the question comes into play what is deductible? I keep EVERY receipt I get. I then put it into Quickbooks and let the accountant tell me which are deductible and which are not. Some things that I know are deductible is a portion of your home since some of it is an office. So you can deduct a portion of your monthly payments.

Other things that you can deduct are portions of your electric, internet, office supplies, paper, ink, etc., business dinners, clothes (only that are specifically bought for work), appearance if you have to present etc, mileage when you go to work related events. There are quite a few things and not all of what you track will be deductible but quite a bit is when you work out of the house.

The upside is obviously these are things that you need to get anyway so by deducting them from your income to get your taxable income you are not paying taxes on money that went out for operations. The downside is that you have to be VERY organized!

I started out 5 years ago keeping every receipt in separate folders. I had folders (and still do) for the following: Car, Check Stubs, Clothes, Credit Cards, Entertainment, Food, Gas, House Insurance, House Loan, House Repairs, Internet, Medical, Misc, Office, Phone, Travel, Tolls, Utilities. This is so if I ever need a receipt I am not trying to search through the whole year.

When I started I would go through the house/cars/etc and find every receipt on Jan 1 and then sit and add them all up. Since then I have started using Quickbooks which I recommend it makes tracking much easier and also helps if you have to go back and try and figure out when you bought something. (For example my monitor went out this year, and I was able to figure out it was out of warranty quickly by doing a search of Best Buy where I knew I had bought it.)

I would then put it all into a spreadsheet with the listings above and took that to the accountant. This saves you TONS of time with the accountant and a lot of money as well. Some people just take receipts to their accountant and they total everything, but this is VERY expensive and I don't recommend it.

Another point I would bring up is that if you chose to itemize on your taxes I would highly recommend against using TurboTax or any program that you do yourself at home. Filing as an independent contractor, business owner, etc requires a lot of knowledge of the tax system and personally I don't have that knowledge to fill out the forms myself. Many people do use these programs, but personally I would prefer to write off the cost of the filing since it is a legal expense that I incurred due to my line of work and payment methods.

If you take the route of setting up your own business, getting a legal name, and tax id (EIN) you will also pay more to have your taxes done, but they can protect you if you are doing outside work. That is not a tax issue though but more of a protection for you if you are looking at bringing in large sums.

Hopefully this helps some and if you have any more specific questions please feel free to leave them for me and I will research to find out more!

Update, please note these are all for the current tax system. If Obama gets into office and his plan is put into effect this changes drastically. The tax system will get more complicated but this will only be if you are self employed or a business owner who brings in more than $50k a year. After all those of us making $50k a year are rolling in the dough... Isn't that nice?