Re: CFI\'s - Do you pay your own taxes?
Lots of good advice here. Just a couple of comments.
Yes, your CFI insurance premium becomes a business expense that may be deducted in calculating taxable income. So do a lot of other expenses (to varying degrees) from books and supplies to aircraft rental for the purpose of maintaining currency or maintaining or improving your teaching skills. Knowing exactly what you can andcannot do is where an accountant's advice can be very valuable. You might check around the airport and try to find one who deals with aviation issues. The advice to maintain good books and records is dead on. Microsoft Money will do the job of recording the information, but you need to maintain the backup paperwork also.
John Tenney is correct. The line between "contractor" and "employee" can be very thin and states will, from time to time, target industries or businesses that they believe are on the "wrong side" (the Colorado labor department targets about one flight school every three years - so far the state has lost each time). But that affects the place where you are working more than you. The bottom line here is that, as an "independent contractor", you are now running a business. So long as that is the case, treat it as a business. You will be entitled to take reasonable business expenses as a deduction, but you will also be responsible for proper record-keeping. You may want to open a separate Money file to keep all business transactions completely separate from your personal ones. The advice to check out your local SBA office is a good one. They have lots of good information on home-based businesses.
Finally a word of warning. While there are definitely some benefits to creating a limited liability entity for the business, beware of the common wisdom that this will somehow protect you or your personal assets if there is an accident in which you are assigned blame. AFAIK, that is =not true= in any state of the US. If, for example, there were an accident during a training flight and fault were assigned to you, the corporate or other limited liability entity would =not= protect you or your house, car, etc. Most of the liability protection benefits don't kick in unless there is someone other than you in the business, and, even then, only insulates you personally for something the other =person= does.