If you work from home as a contractor or freelancer, the home office deduction should be top of mind as you get ready to file your tax return.
The IRS permits a tax deduction for the part of your home you use for work, provided that you and your space meet certain requirements.
Here’s what to know about this tax break, the rules for claiming it, and how to calculate your total deduction.
Full coverage: Taxes 2024 — Everything you need to file your taxes on time
IRS rules for claiming the home office deduction
First, you can’t claim the home office dedication unless you itemize your taxes, so if you plan to take the standard deduction, your home office won’t help you save.
There are a few other important rules to be aware of.
Who qualifies and how it works
You generally need to be a self-employed business owner, freelancer, or independent contractor — not a remote employee — to write off your home office space. While remote employees could claim this deduction in the past, the 2017 Tax Cuts and Job Act eliminated certain unreimbursed employee business expense deductions, including deductions for a dedicated office space.
Your home and office space will also need to meet certain requirements. The IRS defines a home, for purposes of the deduction, as a house, condominium, apartment, mobile home, boat, similar property, or a space in an unattached garage, barn, or shed.
Beyond that, your office must:
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Be an area of your home that you use exclusively (or almost exclusively) and regularly for business activities. So it can’t also be your living room where you watch television with your family or your dining table where you eat meals.
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Be your principal place of business where you work or meet with customers. If you own a daycare or storage facility, other rules and exceptions may apply.
Simplified version vs. actual expense deduction
There are two ways to calculate a home office deduction: the simplified method and the actual expense deduction. Here’s how each works:
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Simplified method: The simplified method is arguably the easier formula. To calculate your total deduction, you multiply the square footage of your office by a rate the IRS sets. For the 2023 tax year, the rate is $5. If you use the simplified version, the maximum square footage is 300, and your maximum deduction is $1,500.
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Actual expense deduction method: The actual expense method, aka the regular method, could result in a larger deduction, but the calculation is more complicated. Instead of multiplying the square footage of your office by a prescribed rate, you calculate your office space as a percentage of your home. Divide the total square footage of your office by the total square footage of your home, then use that percentage to determine the indirect costs of using your space. Indirect costs include mortgage interest, insurance, utilities, repairs, maintenance, depreciation, and rent. Direct costs, such as new carpet or repairs, are fully deductible.
How to calculate your home office deduction
Here are two examples of how the home office deduction works, using both the simplified option and the actual expense approach. For this example, we’ll assume your office is 275 square feet.
Simplified method: There’s just one math problem to do. Multiply the square footage of your office space by this year’s IRS rate.
Office square footage x prescribed rate = total deduction
275 x $5 = $1,375
Your total deduction is $1,375.
Now, here’s how you calculate your deduction using the actual expense method, assuming your home is 2,000 square feet.
(Total square footage of your office / total square footage of your home) x 100 = use percentage
Use percentage x indirect costs (mortgage interest, utilities, homeowners insurance, property taxes, etc.) = indirect cost deduction
(275 / 2,000) x 100 = 13.75%
Now let’s say all your indirect costs add up to $15,000, and your direct costs after repairing a window in your office total $300. (Remember that direct costs are fully deductible.) Here’s your formula:
13.75% x $15,000 = $2,062.50
$2,062.50 + $300 = $2,362.50
Your total deduction is $2,362.50.
In this case, the actual expense method provides a considerably larger income tax deduction. A reputable tax software can simplify the process of calculating your actual expense deduction.
Read more: What is taxable income?
Frequently asked questions (FAQs)
If I work from home as an employee, do I qualify for the home office tax deduction?
You likely won’t qualify for the home office deduction if you’re a W-2 employee working from home. Prior to the 2018 tax year, remote employees could deduct certain unreimbursed business expenses, including home office costs. But the Tax Cuts and Job Act changed the rules about allowable deductions. That said, you may still be able to deduct your home office expenses from your state income taxes depending where you live.
Should you take the home office deduction?
Whether you should take the home office deduction (if you’re eligible to do so) depends on your situation. Some taxpayers may benefit more from taking the standard deduction, but if you’ve determined your tax savings will increase by itemizing, deducting your home office expenses could make sense. Talk to a tax professional about what itemized deductions you qualify for to determine the best course.
What does ‘exclusive use’ mean?
For the purposes of the home office deduction, exclusive use means that your office space is solely used for business purposes. For instance, your living room wouldn’t meet the exclusive use requirement, even if you work there 100% of the time, as it’s likely also used as a relaxing space for your family. The same goes for your dining room, family room, or kitchen.