Self-Employed and Gig Workers: Should You Claim the Home Office Deduction?
The rise of freelancing, self-employed and gig work is one of the biggest labor stories of the last 20 years. More and more workers have been looking beyond the normal nine to five and making their own way in the world, creating an income they can rely on, one that is directly tied to their skills and abilities. COVID-19 only accelerated this trend.
Tax Breaks for Freelancers and Gig Workers
Working as a freelancer or gig worker can open up a world of tax-saving possibilities. From retirement plans with generous contribution limits to health savings accounts for covering high private insurance costs to writing off office supplies and other essentials, this class of workers enjoys some phenomenal tax breaks.
Demystifying the Home Office Deduction
One of the most generous, yet misunderstood deductions is the home office deduction. Many freelancers and gig economy workers avoid it fearing an audit, but this is outdated advice.
Today, the deduction is no more likely to trigger an audit than other business deductions. While small business owners, including freelancers who claim their income on Schedule C, are still more likely to be audited, the overall audit rate is at all-time lows. So, should you take the home office deduction, and how can you tell if you are eligible?
So, How Do You Qualify?
Here’s what you need to know:
Exclusive Use
One crucial requirement is that your home office must be used exclusively for your business. Many freelancers and small business owners block off a section of their home to use exclusively for business, qualifying them for the home office deduction.
You don’t need to allocate large portions of your home to claim this deduction. Even a part of one room could qualify as long as it is distinct and separate from the rest of the area. For instance, partitioning off a section of a spare bedroom can be considered a home office.
Regular Use
The space you claim as a home office must be used regularly for your business. If you designate a room or set of rooms, you cannot switch between business and personal use.
Keeping records of how the space is used can help support your claim if the IRS questions it. Maintaining a log of the hours spent there and the business activities performed can provide crucial support for your deduction.
Primary Place of Business
The home office must serve as your primary place of business to qualify for the deduction. This means it is where you meet with clients, perform your work, and complete business-related paperwork.
Not Every Business Qualifies
The IRS may question the deduction if you:
- Rent office space elsewhere.
- Regularly meet clients off-site.
Detailed Recordkeeping is Essential
Solid recordkeeping is crucial for freelancers claiming the home office deduction. Maintain a detailed daily log of your work activities, either electronically or manually.
Conclusion
The home office deduction is a valuable but underutilized benefit for freelancers and gig workers. If you qualify, take advantage of it! Every tax deduction helps offset the challenges of self-employment.
Tax Help for Freelancers
Tax season can be complex for freelancers. If you have questions about the home office deduction, audits, or other tax matters, consult a qualified tax professional.