If you've transformed a corner of your home into a buzzing hive of creativity, you're not alone. But did you know that your home workspace could actually save you money come tax time? That's right, I'm talking about home office deductions. This is one of the best freelancer tax deductions around and can save you thousands on your taxes.
What Is a Home office deduction?
In simple terms, a home office deduction allows you to write off a percentage of the expenses related to the portion of your home used exclusively for business. This can include rent, utilities, furniture, and more. The catch? The space must be used regularly and exclusively for business activities.Home office deductions are like financial fairy dust for self-employed creatives. They can significantly reduce your taxable income, leaving more money in your pocket. It's a win-win situation: you get a dedicated space to nurture your creativity, and you pay less in taxes.
What qualifies as as home office?
Before you get too excited, it's important to know what qualifies as a "home office." The IRS has specific guidelines. To deduct home office expenses you must meet the following criteria.
✅ Regular and Exclusive Use: Your home office should be used regularly and exclusively for business. This can be a dedicated room, a corner or even a desk.
✅ Principal Place of Business: Your home office should be the primary location for your business activities. If you are renting an office at a nearby co-working space you can’t also take a home office deduction.
The Simplified Method
There are two ways to deduct home office expense. The first method is called the simplified method. This method allows you to deduct $5 a square foot for business use of the home. The maximum deduction amount for this method is $1,500. If you don't want to keep detailed records or fill out additional tax forms this is the way to go. You will simply enter your sqft into the tax filing software you use, and boom its done.
Business Use of Home Deduction
This method requires detailed book keeping but also likely yields a higher deduction. The way this works is that you calculate the % of your home occupied by your home office. You can then write off that % of all your home expenses. You will report this on your tax return a special form called Business Use of Home.
Here's an example of how this method works: Let's say you work primarily from home and have dedicated 300 square feet of your 1,200 sqft home for business use. If your total home expenses are $15,000 you could deduct $3,750 from your taxable income. That's pretty amazing, right?
- Total home expenses: $15,000.00
- Size of your workstation: 300 square feet
- Total deductible amount: $3,750
- Business-use percentage: 25.00%
Home office deductions aren't just a savvy financial move; they're essential for self-employed creatives. These deductions empower you to keep more of your hard-earned money, so you can keep doing what you love. Read up on other self-employed write off's to maximize more of your profits.
Download our free home office expense worksheet here.