Since the time of the corona outbreak, offices have updated the way they work and function.
Employees can work from the comfort of their homes, sitting in their cozy chair and ergonomic home office desk, working on flexible hours. Many employers and employees saw this as an effective way to cut down costs and save time.
Over the recent years, people have shifted to a remote lifestyle, and laws have changed according to the current working environment. Consequently, employees who work from a home office are eligible for a tax break as long as they fulfill certain criteria and conditions. This tax break includes the internet too, do check out our full article on simplified home office deduction including the internet.
However, the eligibility criteria may differ from one person to another when it comes to home office deductions and tax breaks. So, is it better to have a home office? Keeping this question in mind, we have curated this guide of “is it worth claiming home office on taxes” to help you discover the eligibility criteria for the home office deductions. And, the expenses that can reduce your overall taxes.
So, without further delay, let’s get into the details.
Who Is Eligible For A Home Office Tax Deduction?
Table of Contents
- Who Is Eligible For A Home Office Tax Deduction?
- Which Home Office Qualifies For A Tax Break?
- What Expenses Are Tax Deductible?
- How Do You Calculate Tax Deduction?
- Things To Remember While Calculating Your Home Office Deduction
- Do Seasonal Self Employed Candidates Receive Any Tax Break?
- Is It Worth Claiming Home Office On Taxes Frequently Asked Questions ?
- Is It Worth Claiming Home Office On Taxes Conclusion
According to our research, the eligibility criteria for tax deductions can differ from one home office to another. For instance, we compared a husband and a wife who were working from their home offices, respectively.
The wife was eligible for home office deductions while the husband was not. On taking a closer look, we found a key difference that makes them different from each other.
So, what is this key difference? The answer lies in the type of occupation they have.
As soon as the world was struck by the sudden outbreak of the pandemic, the law on taxes was changed. Under the new law, self-employed workers are eligible for a tax cut from their income. But this doesn’t apply to those who are working for a company as an employee.
Gig workers, freelancers, full-time self-employed business owners, and seasonal self-employed workers can all enjoy the tax deduction from their home office expenses. Moreover, freelancers or gig workers can enjoy a tax break even while working for an employer.
Notably, according to the IRS, an employee who receives a W-2 or a paycheck from their company is not eligible for any home office deduction.
Let us take an example to simplify the eligibility. Suppose you have been working as a risk consultant for the last six months at your home as a freelancer. In this case, your entire income is eligible for a home office deduction.
Subsequently, an employee working as a risk consultancy agent for a company cannot enjoy such a home office deduction since they earn a monthly paycheck from their employer.
Which Home Office Qualifies For A Tax Break?
Just like the previous section, your home office should also meet a certain standard if you want to claim business deductions from your income. The current law states that a taxpayer must dedicate a separate structure of their property or a part of their house as a primary place of business.
In addition to this, your home office should be ideal for a daycare facility- meeting with customers, renting out, storing inventory, etc. The IRS also states that you don’t need to be a homeowner to enjoy the home office deductions.
A mobile home, apartment, or boat can also be considered a primary office space as long as you are dedicating the space to your work. Hence, you are not allowed to carry out any other activity in the office space other than the work you have designated for the space.
Changing your home office space frequently without any prior notice would be considered a breach of IRS law. In this regard, the principal place of business can also be a small table as long as you use it just for your business.
Plus, you can perform administrative or management activities of the business through your primary place of business.
In short, your table can be used as a primary place of business, and you can enjoy the tax break as long as you perform daily business activities on it. Having lunch with your family automatically disqualifies your table as a primary place of business.
What Expenses Are Tax Deductible?
Self-employed individuals, small business owners, and freelancers can also apply for a tax deduction if they made any expenses to set up their home office. For instance, a YouTuber can enjoy a tax deduction if he spends money on purchasing equipment like monitors, lighting, cabinets, desk, chair, and many more for his home office.
Any form of indirect expenses such as electricity bills, home office maintenance, monthly Zoom subscription, etc., is also considered for tax deductions. The taxpayers must list down all the expenses as business expenses in the Schedule C form if they want to benefit from the tax deduction.
How Do You Calculate Tax Deduction?
When it comes to calculating the tax deduction, you can use two different methods. The simplified method is easy to understand and calculate but at the same time; you can only enjoy a smaller tax break.
On the other hand, the regular method requires a more complex calculation and recordkeeping, but the deduction you gain from it is larger. To make things easier, we have explained the two methods with appropriate examples in the next sections.
1. Simplified Method
Back in 2013, the IRS introduced a simpler method to calculate the home office expenses deduction that you are eligible to get. Under this method, a taxpayer is allowed to deduct $5 per square foot of their home office.
A maximum of $1500 for 300 square feet can be deducted as a home office expenses deduction from this method. However, this is for as long as the home office is being used for regular and exclusive use.
Let’s assume the homework space is 200 square feet; then, you can enjoy a tax break of $1000 as long as you don’t use that place for any other purpose. The only drawback of this method is the smaller tax deduction cap.
2. Regular Method
Unlike the previous method, the regular method requires extensive and complex calculation and record maintenance, but the tax deduction benefits are higher. While using this method, you can deduct direct expenses and indirect expenses based on the percentage used for the working space at your home.
Indirect expenses could include mortgage interest, utility bills, real estate taxes, basic home repairs, and insurance. Such a method requires you to maintain a detailed record of all your expenses related to the business.
Additionally, you can also deduct a part of your home depreciation and property tax as a part of the indirect expenses.
Things To Remember While Calculating Your Home Office Deduction
While calculating the home office deduction, a few factors need to be considered. The factors are as follows:
1. Home Receipts
Using the regular method requires detailed record-keeping and maintenance. All receipts related to the business should be stored and preserved for cross-reference.
2. Don’t Be Anxious
Compiling your income tax file is a complex task, and getting audited by the IRS can be nerve-wracking, but you should maintain a calm composure. Being anxious will only mess up your file record and bookkeeping.
3. Keep Your Work Space Restricted
The IRS has strict guidelines when it comes to your home office space. Taxpayers who seek to gain from the home office deduction should avoid using their space for any personal activities. Besides this, they are not allowed to shift the place regularly as it could affect the calculation of the tax deduction.
If the home office doesn’t meet the standard requirements of the IRS guideline, then you are liable to lose out on the tax deduction.
4. Inclusion of Depreciation
Depreciation is a form of capital gain tax that you receive at the time of selling your house. Hence, the IRS makes it mandatory to depreciate your property before calculating the tax deduction under the regular method.
On the contrary, taxpayers can exclude the inclusion of depreciation if they use the simplified method.
5. Sale Of Home Property
House owners and real estate contractors will lose out on the capital gain tax if they apply for the tax deduction under the regular method. Capital gain tax can be avoided if a profit of $250,000 or less comes from the sale of your property.
Therefore, house owners will have to choose between capital gain tax or home office deduction.
Do Seasonal Self Employed Candidates Receive Any Tax Break?
Seasonal Self Employed workers or freelancers are entitled to receive home office deductions as long as they meet all the requirements of the IRS. While making their calculation, they should only consider the number of months they have worked as a seasonal self-employed worker.
For instance, let’s say you started a small business in your house as a software developer. The business ran for seven months, and therefore, you are entitled to gain a home office deduction for the last seven months you worked as a software developer.
Is It Worth Claiming Home Office On Taxes Frequently Asked Questions ?
What is Schedule C?
Schedule C is a type of report which is filed to the IRS whenever you pay your income tax. It is a report that lists out all your profit and loss for a business in a given year. In general, sole proprietors such as gig workers, freelancers, and self-employed workers should file this report as they can gain from the tax deduction of their business.
How do you fill out a Schedule C Form?
While filing a schedule C form, you should remember the following factors:
- You should provide a complete balance sheet and income tax statement for the given year.
- All direct and indirect expenses related to the business should be recorded in the form of receipts.
- If your business is dealing with inventories, then proper inventory records should be provided.
- Vehicle records and transportation expenses should be considered while filling out the form.
What is the IRS?
IRS or Internal Revenue Service is a USA government agency that is responsible for collecting all the taxes and making laws related to tax. It was established in 1862 by President Abraham Lincoln. During the COVID outbreak, the IRS revised its laws and introduced new laws for self-employed workers and freelancers.
After the introduction of the new laws and regulations, self-employed workers and sole proprietors have gained significantly from the home office deduction scheme. Moreover, the IRS is also responsible for dealing with excise, estate tax, gift, and corporate matters.
Do employees lose out from the tax deduction?
Since company employees are not entitled to receive any tax deduction, they do lose out on some monetary gain. But at the same time, companies do provide various incentives and bonuses to the employees if they perform well in their work.
Sole proprietors, freelancers, and gig workers don’t receive any incentives since they own the business, and therefore a tax deduction acts as a monetary incentive for such workers. Homeowners, on the other hand, should think twice before making a tax deduction as it could depreciate the price of their property and cause tax-related problems in the future.
Can a freelancer receive a tax deduction if he is working for an employer?
Freelancers are of two types – sole freelancers and company freelancers. Those who work in a company while performing a freelancing task from their home are not entitled to receive any form of tax deduction. They receive the entirety of their income as a paycheck.
Contractual freelancers or sole freelancers can either work by themselves or take contracts from different employers. The employers are the clients of the business, and all the revenue earned from the contracts is taken as the income of the freelancer. They are not restricted to the company’s policy or paycheck roll. Any income received by a contractual freelancer will be eligible for the tax deduction.
Is It Worth Claiming Home Office On Taxes Conclusion
Despite the sudden outbreak of the corona pandemic, we have still continued to live our lives in full comfort and safety. Working remotely has become a common trend in the business world, and we should keep ourselves updated according to the latest trends.
Before we leave, let us sum up some of the important findings. Firstly, sole proprietors, freelancers, and gig workers are eligible to receive tax breaks according to the new law issued by the IRS.
The home office should be restricted entirely for business purposes, and any form of personal activity should be avoided in your home office. Apart from this, taxpayers can calculate their tax deductions by using the two primary methods given by the IRS.
That said, we shall take our leave. Until next time!