Millions of people across the country are enjoying the benefits of self-employment or owning a home based business. However, taxes can be hard to understand even for regular wage earners, and self-employment taxes can be much more complicated. If you are self-employed it is probably good advice to say that unless your return is simple and you feel comfortable handling it on your own, you should probably seek the assistance of a tax professional with your tax returns. Even if you do get assistance from a professional, you still want to make sure that you understand what is going on. You are personally responsible for making tax payments and reporting your income to the Internal Revenue Service (IRS).

According to the IRS, you are self-employed if you are not an employee and you receive income for products or services you provide. You do not have to be involved in the income generating activity on a full time basis, but as long as you are getting money then you are technically self-employed.

If you are self-employed or a business owner, then you must file a business tax return at the same time as your personal income tax return. If you are the sole owner then you will need to file a Schedule C or C-EZ with your return. The net profit from your business will determine whether your business had a net gain or loss. However you can only use a loss as a deduction if it is not attributed to an activity "not engaged in for profit," meaning you cannot claim losses that result from personal expenses or hobbies.

Fortunately you can deduct any and all the costs associated with running your business. According to the IRS, a business expense must be ordinary and necessary, meaning the expense must be common and accepted in your field of business and it must be helpful and appropriate. However, if something you acquire for your business is expected to last more than one year you will generally need to deduct the cost over time. You will need to deduct, through depreciation, part of the cost over multiple tax years.

One final area of self-employment that can reduce your net profit is any payment for self-employment health insurance. These expenses are 100% deductible as long as the plan is established under your business name and your business profits exceed the insurance amount.