No matter what you do for a living, your tax accountant is going to need information from you when it comes time to prepare your annual tax return. If you work from home as an independent contractor or small business owner, you will have tax deductions and tax obligations.
Income Tax Deductions
One of the benefits of working from home is that you can deduct some of your home expenses. It's important to note that a specific area of your home should be designated as your home workspace, and used exclusively for this purpose.
When preparing for your tax return, some of the information your tax accountant will need includes:
- Information about work area – Your accountant will need to know the square footage of your work area. They will also need to know the total square footage of your home so the percentage of space that makes up your work area can be determined. A work area can be a room that is used exclusively for meeting with clients, daycare, inventory storage, or your office.
- Mortgage statement or annual rental information – Your accountant will need your mortgage statement that shows the annual principal and interest paid. If you rent your home, you will need to provide your accountant with your total annual rental amount.
- Homeowners insurance – A portion of your homeowners insurance may be deductible. Have a copy of your annual insurance policy ready for tax preparations.
- Real estate taxes – If you pay property taxes on your residence, be prepared to provide the annual tax statement.
- Utilities – A portion of your utilities are tax deductible for your home office. Utilities include electricity, gas, water, telephone, and internet services.
- Home repairs and maintenance – Certain home repairs may be tax deductible. Provide your accountant with invoices for repairs and maintenance so they can help to determine if the expenses qualify.
Keep a file for tax items and add to it throughout the year. This will be helpful when it comes time to do your final preparations.
Working from home as an independent contractor or business owner may mean paying income taxes on an annual basis. The easiest way to prepare for this is to put money aside as you get paid.
Your tax accountant can help you determine the percentage of your earnings that you should expect to pay income taxes on. This percentage will depend on a number of factors including your marital status, annual income, tax allowances, and allowed deductions. Once you have a general idea, you can set a certain percent of your earnings aside for later tax obligations.
Working from home has many advantages. Make sure you take advantage of them by consulting with a tax preparer like Jeff Baker & Associates, PS prior to tax time.