If you're a freelancer, small business owner, or self-employed person who works from home, you can get a big break on your taxes.
The IRS offers two ways to claim this write off:
- The simplified method
- The regular expenses method
Spoiler alert: The regular expenses method will probably save you more money.
You can skip ahead for a rundown of the simplified method. Otherwise, keep reading to learn the basics of the home office deduction.
How to claim the home office deduction
Want to know whether you qualify to write off home expenses? You can take our home office deduction quiz! But as a refresher, you qualify for this deduction if you have an at-home workstation that is your "principal place of business" — meaning you put it to "regular and exclusive use" for your work.
This home office space doesn't have to be a whole separate room, and you don't have to be there Monday to Friday, nine to five. A desk in your living room is fine, if you don't use it for anything other than work.
Once you've determined you qualify, it's time to decide how to claim your home office write-offs. Your two options are:
- The simplified method: Based completely on square footage
- The regular expenses method: Based on your actual home office expenses and the portion of your home taken up by your office
You can't switch between the two methods over the course of a single tax year. You can switch it up from year to year, though.
What is the simplified method for home office deductions?
This method for calculating home office write-offs is also known as the "standard" home office deduction, since you multiply your square footage by a standard rate. It's been in effect since 2013.
The standard rate used for the simplified method
You get $5 for every square foot of your home office, up to $1,500.
That means that, if your workspace is more than 300 square feet, you won't see any additional tax benefits from that extra space.
The $5 rate has held steady since this method was introduced. But the IRS does reserve the right to adjust it in the future.
How to claim your home office expenses using the simplified method
You’ll use line 30 of your Schedule C, the form used to report profit (or loss) from business.
Keep in mind, though — the IRS won’t let you claim a home office deduction that’s bigger than your gross self-employment income. That means a home office deduction can’t lead to a loss.
For example, if you have a 100 square foot office and you’re using the simplified method, you’d normally be allowed to deduct $500 (100 x $5). But if you only earned $300 from freelancing that year, you can’t write off $500 and take a $200 loss. Your home office deduction is capped at the $300.
Additional tax breaks under the simplified method
Taking the simplified home office deduction means you can’t claim any other home-related business write-offs. Your home insurance, utilities, and so on are covered by the standard rate.
However, homeowners who choose the simplified method can still take home-related personal deductions, like mortgage interest and real estate taxes. They’ll just have to forgo the standard deduction.
What is the regular method for home office deductions?
Opt for the regular method, and you'll have to take these steps:
- Add up the actual amount you spend on home expenses
- Multiply that by the percentage of your home taken up by your office space: your “business-use percentage”
The regular method in action
Here’s an example. Say you work at a desk in the living room of your 800 square foot apartment. Your desk, and the area surrounding it, is 10 feet by 8 feet — 80 square feet in total. Your business-use percentage would be 80 square feet / 800 square feet, or 10%.
If you use the regular method, that's the percentage you'll multiply by the total amount you spend on your actual expenses for your home.
Recordkeeping under the regular method
Historically, this method has been harder when it comes to recordkeeping. Back in the day, you had to make a tally of all your relevant expenses – forcing you to break out dedicated home office spreadsheets or keep purchase records and receipts by hand.
These days, though, apps like Keeper make it easy to automate this expense tracking, so you don't have to do anything manually. Keeper will automatically scan your purchases for home-related expenses — starting with your rent.
How to claim your home office expenses using the simplified method
You’ll use Form 8829, which lets you add up all your home expenses. Learn more about how to fill it out in guide under our home office quiz. (Note: You can only use this form if you don’t have an S corp!)
Skip ahead if you’d like to see examples comparing the simplified and regular methods, side by side. Otherwise, keep reading to find out how the regular method can help you save money in a future tax year.
Carrying over unused home office write-offs
Like with the simplified method, you can’t claim home office expenses that are more than your income. However, unlike with the simplified method, you can “carry over” any leftover write-off amount to your tax turn in future years.
For example, pretend the regular method gives you a home office deduction amount of $700, but your freelance income was only $300. That’s $400 you weren’t able to write off.
The following year, your income shoots up to $2,000, while your home office deduction only rises to $800. You write off that year’s $800, to get $1,200. But it doesn’t stop there: you still have $400 to carry over from the previous year.
Subtract as well, and you’re left with $800 — the actual amount you’ll be taxed on after bringing in $2,000. Here’s a chart so you can see all the numbers in one place:
Taking the depreciation deduction with the regular method
The regular method is the only method that lets you to deduct depreciation of your home.
If you use the simplified option, you can't claim depreciation as a separate deduction. (Depreciation is considered built into the standard rate.)
Simplified vs. regular home office deduction: How do they compare?
The Keeper app takes away the hassle associated with the regular method and makes the simplified method less of a no-brainer from a convenience perspective. But ease isn't the only factor to consider when you're weighing your options.
Most taxpayers want to know, which method will lead to bigger savings on their tax returns?
Based on how the two methods are calculated, you'd probably assume that, the smaller your home office and the higher your rent, the more you'd save from writing off actual expenses.
But, as it turns out, the regular method usually leads to bigger tax savings — even for self-employed people with lower housing costs and more room to work with.
Let's look at three different situations to see how the math shakes out.
Example #1: Urban renter
Let’s say you rent a studio apartment in a city, paying $800 per month for rent.
On top of that, you’ve got to pay for renters insurance and all your utilities — gas, water, electric, and garbage removal. All of that adds up to at least $150 per month.
In this case, you definitely shouldn’t use the simplified method. Let's take a look at why.
For our urban renter, their small at-home workstation gives them only $500's worth of write-offs using the simplified method. But their high expenses let them write off a whopping $1,938 if they opt for the regular method instead.
That's a $1,438 difference, just from tracking actual home expenses.
Example #2: Suburban homeowner
Let's look at another scenario where the housing costs are more affordable, relatively speaking. That's right — we're going to the suburbs!
Now, say you own a one-bedroom home in a suburban neighborhood. Your home is worth $200,000. You get to depreciate it by 3.636% a year, which comes out to $7,272.
On top of that, you’re paying for homeowners insurance and all of your utilities — costing you $120 per month. (It’s less than you’d spend in the city, even though you own.)
Turns out, you still shouldn't use the simplified method.
Moving to the burbs lets you cut your actual expenses by $456.96. But that's not enough to keep the regular method from winning out.
Even in this instance, you're still getting a larger tax write-off than you'd see with the simplified method, by $981.04.
Example #3: Rural homeowner
Now, let's move even further away from the hustle and bustle.
Your home in the countryside is less expensive at $150,000. (At 3.636% a year, that means your annual home depreciation comes out to $5,454.) Your utilities are also cheaper, costing you $100 a month.
Best of all, you’ve got space to spare. It’s enough to carve out a separate 300-square foot room in your residence just for business purposes.
Intuitively, it would make sense for the simplified method to win out in this case. But still, not quite.
By going out to the countryside, you've tripled the square footage of your home office. And so your write-off, under the standard method, has ballooned to $1,500. That’s the max you can get using this method.
Country living means your housing costs are pretty low, especially given the size of your house. But you still wind up with a write-off of $1,663.50 using the regular method.
Turns out, the actual expenses method is still the better choice. After all, you hit the cap on simplified method deductions, and there's no maximum for the regular method.
Which home office deduction method is right for you?
Based on these calculations, the regular method will almost always net you bigger savings at tax time.
In the past, keeping track of your home office expenses was complicated enough to send some folks to the simplified method, even if they knew they were missing out on write-offs. After all, not everyone has the time to painstakingly fiddle with a spreadsheet after every relevant purchase.
Luckily, the Keeper app now makes expense tracking a breeze by doing all that work for you. That means there's really nothing standing between you and your maximum tax savings.
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At Keeper, we’re on a mission to help people overcome the complexity of taxes. We’ve provided this information for educational purposes, and it does not constitute tax, legal, or accounting advice. If you would like a tax expert to clarify it for you, feel free to sign up for Keeper. You may also email firstname.lastname@example.org with your questions.