How to Qualify for the Home Office Tax Deduction

You need to be self-employed, among other criteria

Fact checked by Yarilet Perez
Reviewed by Ebony Howard

Working from home has become increasingly common, especially after the COVID-19 pandemic. Technology like personal computers, the Internet, email, and videoconferencing has made it easier to create a fully functional workspace in the form of a home office.

This arrangement has led to many workers taking advantage of tax breaks, including the home office tax deduction—but only if certain criteria are met.

If you’re self-employed, you may be eligible for this deduction, but it’s important to understand the rules to ensure you’re compliant with Internal Revenue Service (IRS) guidelines. The home office deduction can be a great benefit, but it’s not available to everyone—only those who qualify can take advantage of it.

Key Takeaways

• The home office tax deduction is available to the self-employed if certain conditions are met.
• The space must be used exclusively and regularly for business purposes.
• You can choose between the standard or simplified methods to calculate your deduction.
• You must ensure that your deductions don’t exceed the income generated from your business.

Are You Self-Employed?

First and foremost, to qualify for the home office deduction, you must be self-employed. This includes independent contractors, sole proprietors, freelancers, and anyone who works for themselves. However, just working from home doesn’t automatically make you eligible. Under the 2017 Tax Cuts and Jobs Act (TCJA), only self-employed individuals can claim the home office deduction.

Important

To qualify, you’ll need to demonstrate that your home is your primary place of business, which may require documentation like expense receipts and other supporting records to substantiate your claim.

Is the Space Used Exclusively for Business?

One key requirement for claiming the home office deduction is that the workspace is used exclusively for business purposes. This means the space cannot be used for anything other than work—no storing personal items, watching TV, or working on your personal hobbies.

Moreover, the space must be used regularly for business. A home office only a few times per year will not meet the IRS’s criteria, even if the space is used exclusively for business purposes. These criteria will effectively disqualify many filers who try to claim this deduction but are unable to prove regular and exclusive home office use. It is not necessary to partition off your workspace to deduct it, although this may be helpful if you are audited. A desk in the corner of a room can qualify as a workspace if you count only a reasonable amount of space around the desk when computing square footage.

If you’re in a situation where part of your home is used for daycare services or inventory storage, there are exceptions that might allow you to claim a deduction, even if the space is not used exclusively for business. Home daycare expenses are computed by portioning out the square footage of the home vs. the area used for daycare and the number of hours when the area is used for daycare vs. the number of hours in the year (8,760, or 8,784 in a leap year). Utility rooms such as laundry and storage rooms may also be deductible under certain conditions.

Does Your Business Qualify?

If you have more than one business you run from home, you must be careful when applying the home office deduction. Each business must meet the eligibility requirements separately. If one business does not qualify for the home office deduction, you cannot claim it for any of your businesses. This is an “all-or-nothing” rule, so you must ensure each business line qualifies before claiming the deduction.

People who do not qualify for the home office deduction may still deduct all other standard business deductions. For more information on these deductions, go to the IRS website and download the instructions for IRS Form 2106 and Schedule C.

How to Calculate the Home Office Deduction

There are two choices for calculating a home office deduction: the standard method or the simplified option.

Standard Method

Calculating the home office deduction using the standard method involves completing IRS Form 8829 to calculate the amount of your home office deduction.

The first step in computing expenses is to determine the square footage of the workplace and divide that by the total square footage of the home.

• Step 1: Determine the square footage of your home office. If your home office is a 15-foot by 15-foot room, its total square footage is 225 square feet.
• Step 2: Find the total square footage of your home. For example, if your entire home is 1,600 square feet, you would use that number in your calculation.
• Step 3: Calculate the percentage of your home used for business. In this example, divide 225 by 1,600 to get 0.14 (or 14%). This percentage represents the portion of your home’s expenses that you can deduct as part of your home office expenses.
• Step 4: Allocate your home expenses. Once you’ve determined your business-use percentage, you’ll multiply this percentage by your household expenses that can be written off, such as:
• Mortgage interest
• Property taxes
• Homeowner’s insurance
• Utilities
• Depreciation (if applicable)

Expenses incurred solely for the benefit of the office space are then listed under the “Direct expenses” section of the form. The indirect expenses are totaled and multiplied by the percentage derived earlier (14% from our example). The total indirect expenses are then added to the total direct expenses.

Simplified Method

The simplified method offers a less detailed way to calculate your deduction. It involves multiplying a fixed IRS rate for home office deductions by the number of square feet of your office. Currently, the IRS allows a deduction of $5 per square foot, with a maximum of 300 square feet (up to a $1,500 deduction).

While this method is easier and less time-consuming, you cannot deduct depreciation or other itemized home-related deductions, such as mortgage interest or property taxes, under the simplified method.

Deductions vs. Income

Do your deductions exceed your income? To qualify for the home office deduction, your total deductible expenses can’t exceed the income derived from the business for which the deductions have been taken.

For example, if your total home office deductions amount to $1,200, but you only earned $950 from your business, you can only deduct $950. The remaining $250 can be carried forward to future years to be deducted when your business income exceeds your expenses.

Who Is Considered Self-Employed?

A self-employed person is anyone who earns income through a business directly or a trade they operate themselves. Sole proprietors, consultants, freelancers, and independent contractors are considered self-employed. These individuals typically work without a traditional employer, earning income directly from clients, customers, or business operations.

How Much Is the Self-Employment Tax?

The self-employment tax is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare. Remember that your self-employment tax is a deductible expense. Half of the self-employment tax can be deducted on your Form 1040, similar to the way employers cover half of an employee’s Social Security and Medicare taxes. This helps reduce your overall tax burden.

What Type of Workspace Qualifies as a Home Office?

The workspace must be used exclusively and regularly for business purposes. If the workspace is used for business and personal use, you can’t take the home office deduction. For instance, a living room or bedroom used for personal and business tasks doesn’t qualify for the deduction. It is important to be accurate in case you are audited.

The Bottom Line

Claiming a home office tax deduction can significantly reduce your tax liability if done correctly, but it’s crucial to follow IRS rules to avoid potential issues during an audit. Keep accurate records, and make sure your home office meets all the required criteria before claiming this deduction.

If you are unsure about how to proceed, it’s a good idea to consult a tax professional who can guide you through the process. For more information on how to claim a home office deduction, visit the IRS website and download the instructions for IRS Form 8829.