Today & # 39; hui, about a third American workers are self-employed. Some use it as a go-anywhere, while others manage the struggles and triumphs of freelancing full time. But all of them face the same difficulty every year: determining freelance taxes.
One of the most discussed deductions for freelancers and small business owners is the deduction for home office. However, there are many questions behind this simple term. What counts as home office? Who qualifies for this? And what should you show in case of audit?
We consulted with some industry professionals to get the final word on how the home office deduction works. Here's all you need to know to save a little more when the tax season comes up.
How do you know if you qualify
If you work from home, you are likely to benefit from the home office deduction.
As a financial strategist Clarissa Wilson "Most people think the home office deduction is complicated and usually avoid having to do the math to get this simple deduction." But the deduction is actually quite simple. All you need is a space in your home that you use strictly for business.
This space does not even need to be an entire room. If you have an office installed in a corner or corner of an existing room, this also matters. However, it can not be a versatile space. "It has to be your main place of business and be used regularly and exclusively in your business," says Remington Trolli, who deals with the accounting and preparation of small business tax returns.
This means that your corner desk will not count if you also use it as a dining area when you are not working. And if you have a main office space outside the house, like a coworking space, you probably will not qualify for the home office deduction either.
It's good if you work a little outside of your homebut your home office needs to be your main workspace for the deduction to count. Whether you are a renter or owner of your home, you can benefit from this deduction, but only if you have a specific space used for strictly business purposes.
How to calculate your deduction for home office
If you qualify, you can calculate the amount of your deduction in two ways.
The standard method is the most complicated of the two. "[It] requires you to tabulate all home office expenses and report this amount each year, "says CPA authorized Riley Adams. Basically, you need to determine the percentage of your home occupied by your home office. Then, you can multiply that percentage by the cost of your rent, utilities, maintenance, and other household costs to determine how much of that is going to your home office.
If you choose this route, you will need to keep a careful record of your household bills all year round to make your calculations (and provide evidence during an audit). However, you can simplify your life by using the simplified method instead.
Under this method, you multiply the total square footage of your home office by $ 5 to get the amount of your deduction. For example, a 25-square-foot office would give you a deduction of $ 125.
"To see which method is the most beneficial, you have to calculate both methods," says Adams. But if you have not kept accurate records of your housing expenses during the year, the simplified deduction may be your only choice.
If you take the home office deduction?
The home office deduction is one of the easiest tax deductions available to freelancers. If you have a business space at home and you do most of your work there, there is no reason not to take it.
This deduction can also be an essential reminder of why you must keep careful records as a freelancer. You do not have to keep all your utility receipts in one file. Try a financial software like QuickBooks Independent to make this easy deduction even easier. As a freelancer, every dollar counts, so feel free to take home office deduction (and all other possible deductions).