Taxes are a bear for the self-employed. You don’t have an employer chipping in on Social Security and Medicare, so in return you’re burdened with additional income tax in the form of the self-employment tax. What’s a hard-working, honest businessperson to do? Well, it’s the difference between tax avoidance and tax evasion. It’s your duty to legally avoid paying excessive taxes. And that’s why you should be very familiar with some common self-employment deductions.
Chief among these is the home office deduction. Why is this single deduction so important? It has a cascading effect. If you qualify for the home office deduction, you qualify for all the incidental deductions that go along with it, including rent, utilities, and office supplies.
The IRS has some restrictions on what you can and cannot call your “home office” for the purposes of this deduction. This home office must be both “exclusive” and “regular.” By exclusive, it must be a dedicated part of the home that’s used only for your business. And by regular, the home office must be used on a regular basis, and not just occasionally or for special events.
In addition, the home office must be at least one of the following: a) the principal place you conduct business, b) the place you deal with clients and customers, and c) a separate structure unattached from your home where you conduct business. So, if your home office is both exclusive and regular, and it qualifies under either a), b), or c), you’re in business for the tax deduction, no pun intended.
For tax purposes, you have to determine what percentage of your home is dedicated to the home office. This is done by measuring the office dimensions and comparing it to the square footage of the entire home. You’ll get a percentage—say that 25 percent of your home is made up of the home office. That means you get to deduct 25 percent of many of the expenses associated with your home. This includes rent or mortgage, household supplies, association fees, basic utilities, phone and internet, and even things like the security system or housekeeping.
And as a self-employed individual, your potential tax deductions don’t stop there. Work-related postage and shipping fees? Deductible. Automobile? Keep a mileage log for your work-related driving, and you can deduct that mileage. You can also deduct marketing fees (like business cards or your website), interest on business credit cards, health insurance premiums, expenses associated with education intended to further your career, and meals and entertainment expenses for client meetings.
In any event, keep careful track of all your expenses, and come tax time do some research and see what you can and cannot claim. It can really make a difference.
If you have any questions concerning the Home Office Deduction that I didn’t cover in this post, definitely check out the IRS website for info direct from the horses mouth. It’s actually gotten quite a bit better in recent years, both in terms of language and navigability.
And in the vain of legally avoiding as much tax as possible, please share any home business tax deduction secrets you’ve stumbled upon in the comments. I can always use a few extra deductions on my return!