Your Key to Tax Savings: Home Office Tax Deductions for Self-Employed
MileIQ Team
September 18, 2024
A home office deduction is a tax break for the self-employed — if you’re a freelancer, a contractor, or a small business owner who works from home, you may be eligible. There are two ways to claim it on your tax return: You can deduct a flat rate per square foot or itemize home expenses that were used to maintain your business.
We’ll cover both in more detail, but the key message is, home office deductions are a great way to save money. Like all deductions, they reduce your taxable income which means you may end up with a smaller payment to the IRS. Deductions = good. Don’t miss the opportunity to add it to your tax return.
A home office deduction lets self-employed people get back some of the money spent on maintaining a home office.This can include utilities, rent, mortgage interest, and property taxes.
The portion specification is important: You can only deduct an expense, like your phone bill, for the amount you spent on your business. In that sense, you’re not really deducting your home office, but the expenses you likely incur by maintaining it (quite literally keeping the lights on).
Who Is Eligible for a Home Office Deduction?
If you’re self-employed (not a W2 employee), and you work from home you can likely claim the deduction. Though there are a few additional rules:
Regular and exclusive use: You must use the space in your home exclusively for work on a regular basis. Whether that’s an office or a woodworking workshop, you can only claim deductions for that particular space. Working on the kitchen counter or the couch, would not qualify.
Principal place of business: You need to conduct the majority of your business in the home (including client meetings, administrative work, and all other regular business activities).
The home office deduction is not limited to spaces inside or attached to a house — if you turned your garden shed into an art studio where you regularly work and meet with clients, you could be eligible as well. Even better, both renters and homeowners qualify.
As mentioned earlier, there are two ways to claim the home office deduction:
Simplified Method
This method is straightforward — there’s no record-keeping required and the tax math is on the mild side: Measure the square footage of your work space and then deduct a flat rate of $5 per square foot, up to a maximum of 300 square feet.
For example, if your workspace is 50 square feet, you can deduct $500 by adding it to your Schedule C form. Easy. However you may have spent significantly more money maintaining your workspace. In which case, you’ll want to dive into the actual expense method.
Actual Expense Method
This method requires you to itemize your home office expenses and deduct the portion directly attributable to business use. That not only means keeping track of every phone, internet, and utility bill, but also figuring out which portion of those bills was used for business.
If you want to itemize your deductions, it’s generally recommended you make purchases for your business with a business card, and keep the expenses well defined. That could mean buying and paying for a phone or internet line that’s only used for work. However, that is very challenging to do with some expenses, like mortgage, rent, or electricity bills.
The upside is, that if you don’t mind the record-keeping and are up for doing some math, the actual expenses method can give you a higher deduction. Just be prepared to back up any deductions in case of an audit.
You can use tax Form 8829 to figure out which expenses to add to your home office deduction and then file it together with your Schedule C and 1040 tax form.
Home Office Deduction: Tax Savings Potential
You may be thinking “this all sounds great, but also way too much work.” Or maybe you don’t feel like looking for a tape measure or poring through records of your home in search of square footages.
Before you talk yourself out of it, consider that a relatively modest 200-square foot office is worth a $1,000 deduction (200 x$5), with the simplified method. That could easily push your taxable income into a lower percentage and thus a lower tax bill. Measure once and you’ll be able to reap the benefits for years to come.
Tracking All Business Expenses for Maximum Tax Savings
To maximize your tax savings, it's essential to accurately track all deductible business expenses. This includes not only home office expenses but also mileage driven for work, supplies, and other business-related costs.
Much like home office related expenses, mileage can be particularly tricky to track on your own. Many self-employed people use their personal car to get to a client meeting, but then go on to run errands, pick up their kids, or stop in at a restaurant.
Mileage tracking apps like MileIQ do the work of tracking miles for you. After you arrive at a destination, the app prompts you to classify a drive as business or personal, which you can do with a swipe. Then when tax season comes around, MileIQ provides you with an end-year summary of all your drives, which you can pass on to your accountant.
Home Office Deductions: Key Points
Claiming a home office deduction is a great way to lower your taxable income (and thus your tax bill).
Self-employed people (business owners, contractors, freelancers, and gig workers) who work at home may be eligible. W-2 employees who work from home are not.
To claim the deduction you need to use the space exclusively and regularly for work. And the space needs to be your primary place of business (where you do the bulk of your work).
There are two ways to claim the deduction: The simplified method ($5 per square foot of the workspace) or the actual expense method.
Whichever method you choose, make sure you’re getting all the tax savings you’re owed by filing the home office deduction.
Frequently Asked Questions
Can I take the home office deduction if I’m a remote worker?
You can only take the home office deduction as a self-employed person. If you’re working for a company as a W-2 employee you can’t take the deduction, unless you have a side-hustle or freelance from home on the side.
Can my garage/workshop/she-shed count as a workspace?
Yes, if you’re self-employed, use this space only for your business (e.g. not parking a personal car or working on hobbies in the same garage space), and do the bulk of your work there. All of these conditions can mean you’re eligible for the home office deduction.
How can I figure out business use percentage for my expenses?
You’ll need to estimate how much you use your phone, internet, and electricity for running your business. The only real way to achieve that is to track daily use and be diligent. It may be useful to separate expenses when possible, like getting a business phone.
For mortgage and rent, you may need to measure the square footage of your home office, subtract it from the total square footage of your home or apartment, and then calculate the percentage. You can then deduct that percentage from your rent or mortgage. In short, it’s fairly complex, which is why the simplified method is often preferred.
