But first a caveat. I’m not a financial expert. I have, however, been a freelancer, independent contractor and now a small business owner.

Find a Tax Professional

Because I’m not an expert, I found a tax preparer who I could trust. It’s the number one piece of advice I can give you. And know that I’m right about. Even the IRS can be a little hazy on what’s deductible and what’s not deductible. That’s fun, huh?

The tax code changes every year so it’s up to your tax preparer to keep on top of what you can deduct and what you can’t. In general, small business deductions are any expense you need to make a profit. That goes for any type of business, freelance or independent contractor business you conduct. The IRS defines it this way:

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

Typical expenses include supplies, equipment, software and subscriptions, travel and transportation. How you deduct those is the reason for your tax professional. For example, for transportation there a couple of ways that you can take the deductions. If you have an automobile that used exclusively for the business, then you can deduct practically everything about it from car payments to gasoline. However, if you use your personal car for business, your tax advisor will probably tell you to take a mileage deduction.

That tax professional will also tell you all the other deductions you are entitled to take.

Open a Business Checking Account

This is one of the best things I did for my business. Mingling business and personal is never a good idea and just makes tax time so confusing. Now I have an account (well, actually two, because I also have a PayPal account for my business). All my income goes into those accounts, from sales to freelance earnings. And I pay for all of my expenses through with those accounts. It makes monthly reconciling a breeze.

To open an account, check with your banker to find out what is necessary. Depending on your location you may need different documentation. If you are a sole proprietor and working under your own name, you may need nothing at all. But if you have a business with a different name you may need a business license, of fictitious name registration or more. Your banker will be able to give you all that information.

Save Your Receipts

Save them all. Even with the bank account and a monthly statement you need to keep accurate records for the IRS. And you have to keep them for three years from the date you filed your taxes.

I like to make a note on my receipts to which category these will be filed under. It just makes everything easier at tax time. Make sure you keep all those receipts in a file or shoebox if you would like.

I’m keeping more things on my computer and like to scan my receipts. You can use any scanner to do that but I found a dedicated receipts scanner to work much easier. A couple years ago I bought myself the NeatReceipts scanner. It’s small and doesn’t take up very much room on my desk and so far it’s been working pretty well. I hold my receipts until the end of the week and then sit down to scan them all at one time. Everything goes directly into a file on my computer and I’m done. That doesn’t mean I throw away my receipts, I keep them for backup. 😉

Working from home– and for yourself– brings a whole another layer of complexity but don’t let it scare you. Talking with the professional and setting up your business right, to begin with, will make it a whole lot easier. And you definitely want to be able to deduct those business expenses from your income so you can keep more of it.