Working from home has it’s pros and cons. One of the pros is that when you work from home you may be eligible for a variety of tax deductions that your friends who are still going in to the office may not qualify for. Whether you’re the boss in your own business, an independent contractor, or a freelancer, there are expenses that you can use to reduce your tax bill.
You’ll have to decide which deductions fit your particular circumstances, but here are the five most common deductions taken by those who work from home.
Now before we proceed let me state that I am NOT an accountant or a tax expert. As with all advice you receive on the internet, be sure to check it out for yourself with your own experts to make sure that you’re following the most accurate and up-to-date information and that the information is pertinent and applicable to your situation. NEVER just take someone’s word for something without checking it out. Former teacher here…this is what I’d tell students so I’m telling you.
Home office deduction
The home office deduction is available to people who work from home in their own business (they’re their own boss) or whether you’re telecommuting (working for a company but not from their facilities). A lot of people are telecommuting these days (including my daughter and her significant other) so this is going to be a deduction more and more people consider taking.
However, there are some things you need to know before you try to take your home office as a business deduction so that you don’t get in trouble with the IRS.
The most important thing to remember is that if you want to take the square footage of your home office off of your taxes, the home office must be used exclusively and regularly for business. But if you meet the criteria for a home office then you can deduct part of your home expenses in proportion to the square footage of the office.
This includes things like your rent or mortgage, your property taxes, house insurance, some utilities, and maintenance.
The caveat…and where most people get into trouble with the home office deductions…is that the space MUST be used ONLY for business purposes. If you’re working out of your bedroom then obviously this won’t work. Likewise, if you pull your laptop over and work from the couch, this doesn’t meet the criteria. You do not want to get into trouble with the IRS and you probably don’t want one of their auditors/assessors showing up at your house to look at your workspace to determine what percentage you can deduct.
My opinion is that it’s better safe than sorry.
To get more information about this topic be sure to check out: https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction
Mileage & Travel Expenses
If you’re using your own car for business travel, or if you pay for meals and/or accommodations out of your own pocket, then these expenses might quality for a tax deduction. Examples would include times when you have to actually drive to your company’s office or if you need to go visit a client. You will need to keep all actual receipts (not just credit card statements) for things such as meals and lodging, and keep mileage records.
You can also claim only the amounts that aren’t covered by an employer’s reimbursement policy. For example, I used to go to conferences when I was in education. If the school district didn’t pay the full amount of a hotel then I could claim the difference between the amount they paid and what I had to kick in on my taxes. Again, receipts and good records are a must.
For car mileage, keep a log in the car if you can, and also track things like oil changes and maintenance. I also enter trips into a spreadsheet with the date and how many miles were driven. Your accountant can then determine what is the current amount you can deduct for business mileage.
Itemized deductions vs standard deductions
The amounts for itemized versus standard deductions seem to be changing all of the time. So this is an area where you’ll need to consult the IRS website, forms, or your tax professional. Any information I would give you here likely would be out of date or changed by the time you read this.
But part of the reason you want to keep such good records is that if your business expenses are more than the standardized deductions for a particular year, then you’ll want to itemize them out on your tax return. It would be financially foolish to not take every expense off that you’re entitled to. But that means keeping receipts and good records so that you can justify every exemption.
If your expenses are less than the standard exemption, then take that. The point is that you want to reduce your tax bill as much as is allowable.
Also note that many expenses you can take must be higher than a certain percentage of your gross income. This is another reason why receipts and good records are crucial. It’s up to you to prove to Uncle Sam that your expenditures met their criteria.
You’ll have a separate form you’ll need to complete if you’re taking business expenses off your taxes. In 2016 this was Form 2106 but it may have changed since then. Your tax professional will have the latest information.
Self-employment and independent contractors
If you’re self-employed or an independent contractor, you’re eligible for many of the same deductions but you’re also subject to the same record-keeping requirements that employed workers and telecommuters are. Self-employment income and expenses are generally recorded on a Schedule C of your tax return.
When you work for someone else, your employer pays part of these taxes for you. When you work for yourself, it’s all on you.
If you earn more than a certain amount of net income in a single year, you have to pay self-employment taxes in addition to your income tax. The IRS uses a pay-as-you-go system for the self-employment tax to you’ll need to discipline yourself and send in the estimated tax payments during the year (generally every quarter) so you don’t get hit with a large bill when it’s time to file.
This is where you’ll need to have a bookkeeper or accountant on your team to keep track of the financial information and to fill out and send in the forms. In my opinion, this is a service that is worth paying someone with expertise to take care of.