Do you work from home as a self-employed worker or an employee? Do you want to know how working from home affects your taxes? Do you want to know what expenses you can deduct and how to calculate and report them?
If you answered yes to these questions, it’s your lucky day!
Know that you can enjoy many benefits from working from home, such as flexibility, convenience, and comfort. However, there are some tax implications you must be aware of. To know more about these benefits and implications, you need to read this article.
Continue reading to have a clear understanding of how working from home affects your taxes and how to maximize your tax savings. Start now!
- What Are the Tax Implications of Working From Home
- Who Can Claim Tax Deductions When Working From Home
- What Can You Deduct?
- What Are the Requirements for Home Office Deduction
- What Are the Methods to Calculate Home Office Deductions
- How Can You File Taxes When Working From Home?
1. What Are the Tax Implications of Working From Home
To know what the tax implications of working from home are, first check your employment status. See whether you are an employee or a self-employed worker. You are an employee if you work for an employer and receive a salary or wages, while you are self-employed if you run your own business or work as an independent contractor or freelancer.
Don’t expect to claim any federal tax deductions for your work-from-home expenses if you are an employee who works from home. You may want to know why, but here is the reason. The 2018 tax reform eliminates the itemized deduction for unreimbursed employee expenses, which include expenses related to working from home, such as internet, phone, office supplies, etc.
However, some states may still allow you to deduct these expenses on your state tax return, so check your state tax rules to see if you qualify. The only exception to this rule is if you are an employee who works from home due to a temporary or permanent disability.
On the other hand, if you are a self-employed worker who works from home, you may be able to claim tax deductions for your work-from-home expenses as business expenses. In fact, as a self-employed worker, one of the most common and valuable tax deductions for you is the home office deduction. This deduction allows you to deduct a portion of your home expenses, such as mortgage interest, property taxes, utilities, repairs, etc., that are related to your business use of your home.
2. Who Can Claim Tax Deductions When Working From Home
Generally, you can only claim tax deductions when working from home if you are a self-employed worker. This includes freelancers, independent contractors, and business owners who use part of their home as their principal place of business or a place where they regularly meet clients or customers or store inventory.
You must also use the space exclusively and regularly for your self-employed business.
3. What Can You Deduct?
If you qualify for the home office deduction, know that you can only deduct a portion of your home expenses that are related to your business use of your home. The type and amount of expenses that you can deduct depend on the method that you use to calculate your deduction: the simplified method or the direct method.
If you use the simplified method, do not keep track of your actual expenses or allocate them between the business and personal use of your home. Instead, simply multiply the square footage of your home office by a standard rate of $5 per square foot, up to a maximum of 300 square feet.
This gives you the amount of your home office deduction, which cannot exceed $1,500 per year. Note that with the simplified method, you cannot deduct any other expenses related to your home office, such as depreciation, insurance, repairs, etc. However, it does not affect your ability to deduct your mortgage interest and property taxes on your tax return, as long as you meet the usual requirements for those deductions.
On the contrary, if you use the direct method, keep track of your actual expenses and allocate them between the business and personal use of your home. You can deduct the portion of your expenses that are related to your business use of your home, such as:
- Mortgage interest
- Property taxes
- Utilities
- Insurance
- Repairs and maintenance
- Casualty losses
- Depreciation
4. What Are the Requirements for Home Office Deduction
To claim the home office deduction, you must meet two main requirements:
First, use part of your home as your principal place of business or a place where you regularly meet clients or customers or store inventory. Your principal place of business is the place where you perform most of your income-producing activities.
It does not have to be the only place where you conduct business, but it must be the most important one. If you have more than one place of business, consider factors such as the amount of time you spend, the level of activity, and the relative income you earn at each location to determine which one is your principal place of business.
If your home office is a separate structure, such as a garage or a shed, then it does not have to be your principal place of business, as long as you use it regularly and exclusively for your business.
Second, use the space exclusively for your self-employed business. This means that you cannot use the space for any personal or family purposes, such as watching TV, playing games, sleeping, etc. The only exception to this rule is if you use part of your home as a daycare facility or for the storage of inventory or product samples.
In that case, you do not have to use the space exclusively for your business, but you must use it regularly for your business.
If you meet these two requirements, you can claim the home office deduction for the part of your home that you use for your business. However, ensure you follow certain rules and methods to calculate and report your deduction, which the next section of this article explains.
5. What Are the Methods to Calculate Home Office Deductions
Know that there are two methods that you can use to calculate your home office deduction: the simplified method and the direct method. Although you can choose the method that works best for you, you must use the same method for all your home offices in the same tax year. You can also change the method from year to year, as long as you follow the IRS rules and instructions.
The simplified method is an easy and convenient way to calculate your home office deduction. You don’t have to keep track of your actual expenses or allocate them between the business and personal use of your home. Instead, simply multiply the square footage of your home office by a standard rate of $5 per square foot, up to a maximum of 300 square feet. This gives you the amount of your home office deduction, which cannot exceed $1,500 per year.
In contrast, you can trust the direct method. It is a more accurate and complex way to calculate your home office deduction. You to keep track of your actual expenses and allocate them between the business and personal use of your home. You can deduct the portion of your expenses that are related to your business use of your home, such as mortgage interest, property taxes, utilities, repairs, insurance, etc. You can also deduct depreciation and casualty losses related to your home office, which are not allowed under the simplified method.
To use the direct method, determine the percentage of your home that you use for your business. You can do this by dividing the square footage of your home office by the total square footage of your home. For example, if your home office is 200 square feet and your home is 2,000 square feet, you can divide 200 by 2,000 and get 10% as your business use percentage.
6. How Can You File Taxes When Working From Home?
To know how to file taxes when working from home, report your home office deduction on your tax return which is Form 1040.
The way you do this depends on the method you use and the type of business you have.
If you used the simplified method, file Form 8829, Expenses for Business Use of Your Home, with your tax return. Enter the square footage of your home office and the amount of your deduction on this form. You also need to attach a statement that shows the calculation of your deduction, such as 200 square feet x $5 = $1,000.
If you are a sole proprietor, report your home office deduction on Schedule C, Profit or Loss From Business, of Form 1040, U.S. Individual Income Tax Return. You need to enter the amount of your deduction on line 30 of Schedule C.
If you are a partner, report your home office deduction on Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., of Form 1065, U.S. Return of Partnership Income. You need to enter the amount of your deduction on line 13 of Schedule K-1, with code P.
If you are an S corporation shareholder, report your home office deduction on Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, etc., of Form 1120-S, U.S. Income Tax Return for an S Corporation. You need to enter the amount of your deduction on line 17 of Schedule K-1, with code P.
If you use the direct method to calculate your home office deduction, you need to:
- Keep track of your actual expenses and allocate them between the business and personal use of your home.
- Determine the percentage of your home that you use for your business by dividing the square footage of your home office by the total square footage of your home.
- Multiply your total expenses by your business use percentage to get the amount of your home office deduction.
- File Form 8829, Expenses for Business Use of Your Home, with your tax return and report your deduction on Schedule C, Profit or Loss From Business, if you are a sole proprietor, or on Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., or Shareholder’s Share of Income, Deductions, Credits, etc., if you are a partner or an S corporation shareholder.
>>>GET SMARTER: Dependent Tax Deductions and Credits for Families
Recap
Remember that working from home can be a great way to enjoy flexibility, convenience, and comfort in your work life. However, it also comes with some tax implications that you must be aware of and prepared for. Depending on whether you are an employee or a self-employed worker, you may or may not be able to claim tax deductions for your work-from-home expenses.
If you are eligible for the home office deduction, you must meet certain requirements and follow certain rules and methods to calculate and report your deduction. By doing so, you can reduce your taxable income and your tax liability, and save money on your taxes. Working from home does not have to be taxing, as long as you know what to do and how to do it.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. . For comprehensive tax, legal or financial advice, always contact a qualified professional in your area. S’witty Kiwi assumes no liability for actions taken in reliance upon the information contained herein.
No Comment! Be the first one.