Taxes Spelled With DiceMore Americans are working for themselves than ever before. Call them freelancers, contractors, micro business owners, entrepreneurs…a recent report says that there are now 17 million full-time independents in the U.S.

Even if this is your first year as self-employed, you probably already know that your income taxes are more involved than your colleagues who only have a W-2. However, the complexity also brings opportunity, as freelancers can deduct a lot of their expenses, such as the cost of a computer, office supplies, and work-related travel.

Here’s what you need to know if you’re navigating your income taxes as an independent for the first time this year:

Reporting your income

Sole proprietors need to file a Schedule C with their 1040 to tell the IRS whether their business made a profit or loss for the year. On Schedule C, line 1 (“Gross receipts or sales”), you’ll report all the income made throughout the tax year, including amounts reported on 1099 forms that were issued by your clients.

Keep in mind that self-employed taxpayers are required to keep track of their income. It doesn’t matter if the income received is cash, check or other form of payment, or whether the amounts are reported by clients on Form 1099-MISC.

Reporting your expenses

The nice thing about a Schedule C is that you can reduce your income by any business-related expenses. You pay income tax and self-employment tax only on your net profit (gross income minus expenses). Therefore, it really pays to stay on top of your deductions and know exactly what can be expensed. For example…

1. Home office deductions:

If you work from home, you may be able to deduct some of your housing costs using Form 8829: Expenses for Business Use of Your Home. To qualify, you need to have a “home office” that is used exclusively for your business activities (unfortunately, if your office area is your dining room table where you also eat dinner from time to time, you cannot take this deduction).

Many work-at-homers are discouraged from taking the home office deduction because it’s been considered a red flag for an IRS audit. However, as far as I’m concerned, if you’re legitimately entitled to the deduction, take it. It can be a significant amount, as you can write off a percentage of certain home expenses, including: rent or mortgage payments, insurance (homeowners or renters), and utilities. You can read more about it here.

2. Office supplies and other expenses:

You’re allowed to deduct the cost of equipment and supplies you buy for your business; for example: a desk, filing cabinet, printer, and small office supplies like pens, envelopes, paper, printer ink, etc. If you bought a new laptop or tablet last year, it can also be deducted if it’s used for business purposes. However, if you have one laptop that you use partly for business and partly for personal, you’re allowed to deduct the percentage based on how much it’s used for business purposes.

Publication 535 gives all the details for business expenses. And, for that will last for more than one year equipment (like furniture or your laptop), you’ll need to fill out Form 4562: Depreciation and Amortization.

3. Mileage (car and truck expenses):

Freelancers can deduct some of their car and travel expenses. However, commuting is considered “personal” and is not deductible. This means that if you’re self-employed and rent an office somewhere, you cannot deduct your drive to the office. However, you can deduct travel to meet with a client, purchase business supplies, attend an industry event, etc.

If you’re driving to meet a customer, you can take a standard mileage rate deduction (it’s 55.5 cents per mile for 2012). This standard mileage rate covers all the general operating expenses, such as gas, oil, repairs, insurance, the original cost of the vehicle. So, if you’re taking the standard mileage rate, don’t think about expensing your gas purchases too. However, you can add on parking and toll fees. Check out IRS Publication 463 for more details, including if you decide to calculate your auto deductions based on actual expenses.

4. Travel, meals, and entertainment:

Meals and lodging are deductible when you travel out of town overnight to conduct business. For example, let’s say you flew to a client’s headquarters (and had to foot the bill yourself) or you attended a conference. In these cases, you can fully deduct your transportation costs (plane/train ticket, taxi, airport parking, etc. You can also deduct hotel costs and claim a daily meal allowance for any business days. Refer to Publication 1542 for the per diem rates and other details.

When you take a client out for a meal or other entertainment event (such as a baseball game), 50% of the cost is deductible as a business expense  provided that business was discussed before or after the event.

5. Other deductions:

The expenses outlined above are just a subset of potential deductions. You may also be able to deduct the cost of health insurance for you and your family, membership dues for a professional organization, business-related gifts to clients, and more. And don’t forget about contributing to a tax-deferred retirement plan.

As always, it’s best to not try to stretch things too much and take only the deductions you’re entitled to (keeping all the receipts to support your deductions). Talking with a qualified small business tax professional is always a good idea to make sure you’re following the rules and are taking all the deductions available to you.

Next steps

If this is your first year filing taxes as a sole proprietor, you’ll soon realize that you need to pay self-employment taxes in addition to income taxes. This can leave you wondering what happened to all your hard-earned money. Many freelancers start out as sole props and eventually form an S Corporation or an LLC that’s taxed as an S Corporation in order to reduce self-employment taxes.

While it’s too late to impact your 2012 taxes (or maybe not, if you have not filed yet and have until April 15th), the end of tax time is a perfect time to reassess what’s next for your business. You can talk to a tax advisor about what business structure will be right for you.

 Editor’s Note: This was originally written by Nellie Akalp for Mashable.