Today, about a third of U.S. workers have a freelance job. Some use it as a side hustle, while others manage the struggles and triumphs of freelancing full-time. But all of them face the same difficulty each year: figuring out freelance taxes.
One of the most-talked-about deductions for freelancers and small business owners is the home office deduction. However, many questions hide behind that simple term. What counts as a home office? Who qualifies for it? And what would you need to show in case of an audit?
We consulted a few industry professionals to get the final word on how the home office deduction works. Here’s everything you need to know to save a little more when tax season comes.
How to Know If You Qualify
If you work from home, you actually have a good chance of qualifying for the home office deduction.
As financial strategist Clarissa Wilson explains, “Most people think that the home office deduction is complicated and usually forgo having to do the calculations to get this simple deduction.” But the deduction is actually pretty straightforward. All you need to have is a space in your home that you use strictly for business.
That space doesn’t even have to be a whole room. If you have an office set up in some nook or corner of an existing room, that counts, too. However, it can’t be a multipurpose space. “It needs to be your principal place of business and be used regularly and exclusively in your business,” says Remington Trolli, who does bookkeeping and tax preparation for small businesses.
This means that your corner-of-the-living-room office won’t count if you also use it as a breakfast nook when you’re not working. And if you have a main office space outside of the home, like a coworking space, you likely won’t qualify for the home office deduction either.
It’s okay if you do some work outside of your home, but your home office needs to be your primary workspace to count for the deduction. Whether you rent or own your home, you can take this deduction—but only if you have a specific space used strictly for work.
How to Calculate Your Home Office Deduction
If you qualify, you can calculate your deduction amount in one of two ways.
The standard method is the more complicated of the two. “[It] requires you to total all home office expenses and report this amount each year,” explains licensed CPA Riley Adams. Basically, you have to figure out what percentage of your home is occupied by your home office. Then, you can multiply that percentage by the cost of your mortgage or rent, utilities, maintenance, and other household costs to figure out how much of those costs go toward your home office.
If you go this route, you’ll need to keep careful records of your household bills all year to do your calculations (and offer evidence in an audit). However, you can make life easier by using the simplified method instead.
In this method, you multiply the total square footage of your home office by $5 to get your deduction amount. For example, a 25-square-foot office would give you a deduction of $125.
“To see which method is more advantageous, you’ll need to calculate both methods,” says Adams. But if you haven’t kept careful records of your home expenses over the year, the simplified deduction might be your only choice.
Should You Take the Home Office Deduction?
The home office deduction is one of the easier tax deductions available to freelancers. If you have a dedicated space for business at home, and you do most of your work there, there’s no reason not to take it.
This deduction can also serve as an essential reminder of why you need to keep careful records as a freelancer. You don’t need to keep all your utility receipts in a file folder, though—try financial software like QuickBooks Self-Employed to make this easy deduction even easier. As a freelancer, every dollar counts, so don’t hesitate to take the home office deduction (and every other deduction you can).