US Self-Employment Tax: Do expenses stack with the 50% SE deduction?
Business expenses reduce business income. The SE tax is paid on business income. The credit for 1/2 the SE tax is based on the amount of SE tax paid. So:
The money from the employer is counted as income for you, and should be included in the numbers on your W-2.  You also have tuition you paid. That is an educational expense. That would generally be a tax credit if you qualify for those educational tax credits. If the money from the employer was counted as income you can use also claim tuition expenses. If the money wasn't included as income you then can't claim the tuition as an educational expense. My experience has been that expenses such as books have not been covered, but could be paid for with the money from a 529. Money to cover mandatory fees: such as lab fees and a fee that all students must pay can be counted as tuition expenses. Regarding customized books, those are much harder to prove. If you were to count that particular book as a tuition expenses, and were audited, you would have to show them the book to prove it. Most books aren't mandatory. Also if you do want to claim the books as an expense, remember to account for the money that is returned if any are sold back to the bookstore at the end of the term. Couple of points about being a consultant in the US: It sounds like the rules for what you can deduct may be more lax in Italy.  For example, you can deduct a certain percentage of your home for work but the rules are relatively strict on your use of that space and how much is deductible.  Also things like clothes, restaurants, phones, car use, etc must follow IRS guidelines to be deductible.  This often means they are used exclusively for work and are required for work.  A meal you eat by yourself is not generally deductible, for example.  Any expense you would have had anyway if you were not working is generally not deductible. A contractor in the US can organize in various ways, including sole proprietorship, an S-corp, and a C-corp.  Each has different tax and regulatory implications.  In the simple case of a sole proprietorship, one must pay not only regular income tax but also self-employment tax, which is the part of social security and medicare tax normally paid for by one's employer.  Estimated taxes must be paid to the government quarterly and then the actual amount due synced up at the end of the year (with the government sending you the difference or vice versa). Generally speaking contractors may set aside more money pre-tax for retirement and have better investment options.  This is because solo 401(k) retirement accounts are cost-effective and flexible and the contractor can set aside the full $18K pre-tax as well as having the company contribute generously (pre-tax) to the retirement account.  Contractors can also easily employ spouses and set aside even more. The details of how frequently you are paid as a contractor and how much notice (if any) the company must give you before terminating your relationship are negotiated between you and the company and are generally pretty flexible.  You could get paid your whole year salary in a lump sum if you wanted.  The company that is paying you will not normally give you any benefits whatsoever...in this way it is the same situation as it is in Italy. By the way the three points you mention in your edit are definitely not true in the US. First, the SSN isn't an issue. She will need to apply for an ITIN together with tax filing, in order to file taxes as Married Filing Jointly anyway. I think you (or both of you in the joint case) probably qualify for the Foreign Earned Income Exclusion, if you've been outside the US for almost the whole year, in which cases both of you should have all of your income excluded anyway, so I'm not sure why you're getting that one is better. As for Self-Employment Tax, I suspect that she doesn't have to pay it in either case, because there is a sentence in your linked page for Nonresident Spouse Treated as a Resident that says However, you may still be treated as a nonresident alien for the   purpose of withholding Social Security and Medicare tax. and since Self-Employment Tax is just Social Security and Medicare tax in another form, she shouldn't have to pay it if treated as resident, if she didn't have to pay it as nonresident. From the law, I believe Nonresident Spouse Treated as a Resident is described in IRC 6013(g), which says the person is treated as a resident for the purposes of chapters 1 and 24, but self-employment tax is from chapter 2, so I don't think self-employment tax is affected by this election. "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.  (IRS, Deducting Business Expenses) It seems to me you'd have a hard time convincing an auditor that this is the case.  Since business don't commonly own cars for the sole purpose of housing $25 computers, you'd have trouble with the ""ordinary"" test.  And since there are lots of other ways to house a computer other than a car, ""necessary"" seems problematic also." So there are a lot of people that get into trouble in your type of self employment situation.  This is what I do, and I use google drive so there are no cost for tools.  However, having an accounting system is better. Getting in trouble with the IRS really sucks bad. The short answer is you are not required to.  The longer answer depends on whether you are referring to your organization as a sole proprietorship in your state, or for federal taxation.  For federal tax purposes, I would suggest filing each side job as a separate Sch C though.  The IRS uses the information you provide about your sole proprietorship to determine whether or not your categorization of expenses makes sense for the type of business you are.  This information is used by the IRS to help them determine who to audit.  So, if you are a service based business, but you are reporting cost of goods sold, you are likely to be audited. I suggest to start charging slightly more than needed to cover expenses. All you need is to show profit. It doesn't have to be significant - a couple of hundred of dollars of consistent yearly profit should suffice to show a profitable business. Then you can deduct on Schedule C all the related expenses. The caveat is that the profit (after the deduction of the expenses will be a bit smaller) will be subject to not only income tax but also the self-employment tax. But at least you'll pay tax on profit that is not entirely phantom. I remember suggesting you getting a professional consultation on this matter a while ago. You should really do that - talk to a EA/CPA licensed in your state, it may be well worth the $100-200 fee they'll charge for the consultation (if at all...). A computer is a special case because the IRS thinks that you might be using it for personal applications.    You may need to keep a log, or be able to state that you also have another computer for non-business use. That said, if your schedule C shows a small profit then you don't need to itemize expenses, just state the total. "There's one factor the previous posters apparently missed here: You say ""self-employment tax""--in other words, at least some of that $16k is from self employment.  In a normal employment situation the FICA tax is taken out of your paycheck, it's normally spot on and generally doesn't show up on your tax return. However, for the self-employed it's another matter.  You pay the whole 15.3% from the first dollar and this does show up on your tax return.  If it's all self employment money you would have about $2.5k in tax from this." "Being self-employed, your ""profit"" is calculated as all the bills you send out, minus all business-related cost that you have (you will need a receipt for everything, and there are different rules for things that last for long time, long tools, machinery).  You can file your taxes yourself - the HRS website will tell you how to, and you can do it online. It's close to the same as your normal online tax return. Only thing is that you must keep receipts for all the cost that you claim.  Your tax: Assuming your gross salary is £25,000 and your profits are about £10,000, you will be paying 8% for national insurance, and 20% income tax. If you go above £43,000 or thereabouts, you pay 40% income tax on any income above that threshold, instead of 20%, but your national insurance payments stop." I'm assuming you are in the US here. From a tax perspective you don't need to take any action to start a business and deduct expenses.  If you have earned income coming from a source other than a W2 paying job, then you have a business.  On your taxes, this means you file a schedule C (which is where you will deduct business expenses) and schedule SE (which computes how much FICA tax you will owe on your business income).  When we talk about starting a business, we usually are talking about creating a corporation or LLC.  No particular tax advantage to that in your case, but there could be liability advantages, if you are concerned about that. If you file losses consistently year after year, the IRS might try and classify your business as a hobby.  That's what you should worry about.  I suppose incorporating might reduce the probability of that, but it might not.  Keep good records in case you need to argue with the IRS.  If you do have to argue with them, they will want to ensure that you only used the laptop and internet for your business.  That's a big if, but it's a potentially scary one. IRS Guidelines on hobby vs. business income Note: besides deducting expenses, another advantage of self-employment is opening a solo-401(k) or SEP or SIMPLE IRA.  These potentially allow you to set aside a lot more money than the typical IRA and 401(k) arrangement.  Thing is, you have to have a lot more earned income to really take advantage of them, but let's hope your app gets you there. It depends on the finances involved, but particularly if you're not billing anything right now and may have no revenue this year, it's probably a good idea to bill his company. This is in part because some deductions or other tax treatments are only allowed if you have revenue and/or income.  The biggest example I can think of is the Solo 401k - you can only contribute up to your self employed income.  If you're planning to contribute to one (and you should, they're amazingly powerful tools for saving for retirement and for reducing your tax burden), you will have to have some revenue in order to have something to pay yourself with. I don't believe you have to charge him, though, if it makes more tax sense not to (for example, if his business is operating at a loss and cannot benefit from expensing it, but you'd then have to pay taxes on your own income from it). "I am very late to this forum and post - but will just respond that I am a sole proprietor, who was just audited by the IRS for 2009, and this is one of the items that they disallowed.  My husband lost his job in 2008, I was unable to get health insurance on my own due to pre-existing ( not) conditions and so we had to stay on the Cobra system.  None of the cost was funded by the employer and so I took it as a SE HI deduction on Line 29.  It was disallowed and unfortunately, due to AGI limits, I get nothing by taking it on Sch. A.  The auditor made it very clear that if the plan was not in my name, or the company's name, I could not take the deduction above the line.  In his words, ""it's not fair, but it is the law!""" I think you can. I went to Mexico for business and the company paid for it, so if you are self employed you should be able to expense it. Alright, team!   I found answers to part 1) and part 2) that I've quote below, but still need help with 3).  The facts in the article below seem to point to the ability for the LLC to contribute profit sharing of up to 25% of the wages it paid SE tax on.  What part of the SE tax is that?  I assume the spirit of the law is to only allow the 25% on the taxable portion of the income, but given that I would have crossed the SS portion of SE tax, I am not 100%.  (From http://www.sensefinancial.com/services/solo401k/solo-401k-contribution/) Sole Proprietorship Employee Deferral The owner of a sole proprietorship who is under the age of 50 may make   employee deferral contributions of as much as $17,500 to a Solo 401(k)   plan for 2013 (Those 50 and older can tack on a $5,500 annual catch-up   contribution, bringing their annual deferral contribution to as much   as $23,000). Solo 401k contribution deadline rules dictate that plan   participant must formally elect to make an employee deferral   contribution by Dec. 31. However, the actual contribution can be made   up until the tax-filing deadline.  Pretax and/or after-tax (Roth)   funds can be used to make employee deferral contributions. Profit Sharing Contribution A sole proprietorship may make annual profit-sharing contributions to   a Solo 401(k) plan on behalf of the business owner and spouse.   Internal Revenue Code Section 401(a)(3) states that employer   contributions are limited to 25 percent of the business entity’s   income subject to self-employment tax. Schedule C sole-proprietors   must base their maximum contribution on earned income, an additional   calculation that lowers their maximum contribution to 20 percent of   earned income. IRS Publication 560 contains a step-by-step worksheet   for this calculation. In general, compensation can be defined as your   net earnings from self-employment activity.  This definition takes   into account the following eligible tax deductions: (1) the deduction   for half of self-employment tax and (2) the deduction for   contributions on your behalf to the Solo 401(k) plan.  A business   entity’s Solo 401(k) contributions for profit sharing component must   be made by its tax-filing deadline. Single Member LLC Employee Deferral The owner of a single member LLC who is under the age of 50 may make   employee deferral contributions of as much as $17,500 to a Solo 401(k)   plan for 2013 (Those 50 and older can tack on a $5,500 annual catch-up   contribution, bringing their annual deferral contribution to as much   as $23,000). Solo 401k contribution deadline rules dictate that plan   participant must formally elect to make an employee deferral   contribution by Dec. 31. However, the actual contribution can be made   up until the tax-filing deadline.  Pretax and/or after-tax (Roth)   funds can be used to make employee deferral contributions. Profit Sharing Contribution A single member LLC business may make annual profit-sharing   contributions to a Solo 401(k) plan on behalf of the business owner   and spouse. Internal Revenue Code Section 401(a)(3) states that   employer contributions are limited to 25 percent of the business   entity’s income subject to self-employment tax. Schedule C   sole-proprietors must base their maximum contribution on earned   income, an additional calculation that lowers their maximum   contribution to 20 percent of earned income. IRS Publication 560   contains a step-by-step worksheet for this calculation. In general,   compensation can be defined as your net earnings from self-employment   activity. This definition takes into account the following eligible   tax deductions: (i) the deduction for half of self-employment tax and   (ii) the deduction for contributions on your behalf to the Solo   401(k).  A single member LLC’s Solo 401(k) contributions for profit   sharing component must be made by its tax-filing deadline.