Should I Use the Simplified Home Office Deduction?
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, and the regular expenses method.
Let's go over how the two methods work. Then, we can figure out which method will save you more money on your taxes.
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. And even if you conduct some business outside your home, you're still in good shape to claim business use of your home.
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 method, based on your actual home office expenses and the portion of your home taken up by your office
Keep in mind, you can't switch between the two 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
The simplified method is as simple as its name sounds: 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 IRS calls that 300 the “allowable square footage of home use for business”.)
The $5 rate has held steady since this method was introduced. But the IRS does reserve the right to adjust it from time to time.
What is the regular method for home office deductions?
Opt for the regular method, and you'll add up the actual amount you spend on home expenses, then multiply that by the percentage of your home taken up by your office space.
Say you work at a desk in the living room of your 800 square foot apartment. Your desk is, and the area surrounding it, is 10 feet by 8 feet — 80 square feet in total. Your business-use percentage, then, 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 by hand.
These days, though, apps like Keeper Tax make it easy to automate this expense tracking, so you don't have to do anything manually. Keeper Tax will automatically scan your purchases for home-related expenses — starting with your rent.
Taking the depreciation deduction with the regular method
It's also worth mentioning at this point that only the regular method allows you to deduct depreciation of your home.
Homeowners who choose the simplified method can still take home-related itemized deductions like mortgage interest and real estate taxes as a personal deduction. They’ll just have to forgo the standard deduction.
Simplified vs. regular home office deduction
Keeper Tax 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 return?
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 it turns out, the regular method almost always leads to bigger tax savings — even for self-employed people with lower housing costs and more room to work with.
Let's look at some examples to see how the math shakes out.
Example #1: Urban renter
Let’s say you rent a studio apartment in a city. On average, that means you’re paying $800 per month for rent.
On top of that, you’ve got to pay for Wi-Fi, renters insurance, and all of 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 $1,934 if they opt for the regular method instead.
That's a $1,434 difference, just from tracking actual home expenses.
Example #2: Suburb 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, and of course you’re paying for Wi-Fi, homeowners insurance, and all of your utilities — costing you at least $150 per month.
Turns out, you still shouldn't use the simplified method.
Moving to the burbs lets you cut your actual expenses by $392. But that's not enough to keep the regular method from winning out.
You're still getting a larger tax write-off than you'd see with the simplified method, by $1,042.
Example #3: Rural homeowner
Now, let's move even further away from the hustle and bustle.
Your home in the countryside is less expensive, and you’ve got room to spare — enough to carve out a separate 300-square foot room in your residence just for business purposes. (Or maybe it's a barn!)
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 simplified method, has ballooned to $1,500 — 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 $1,831 using the regular method.
Turns out, tracking your home expenses will still give you a tax write-off of $331 more. After all, you hit the cap on simplified method deductions, and there's no maximum for the regular method.
Which method is right for me?
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 savings. After all, not everyone has the time to painstakingly fiddle with a worksheet after every relevant purchase.
Luckily, the Keeper Tax 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 Tax, we’re on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please email firstname.lastname@example.org if you have questions.