If you are a freelancer who uses your home as your main place of business, and if you draft and send all your invoice templates from home, you have probably filled out (or will) form 8829 for your self employment tax. This IRS document is titled “Expenses for Business Use of Your Home” and is a common one for self-employed individuals to fill out each tax year. While you probably won’t recognize the form if you use common software services, you are still filling it out; they simply automate the process through a series of questions and answers.
Discover our instructions for using the Form 8829 for your home business!
Are you eligible for form 8829?
Before you assume that the form applies to you, there are a few things the IRS wants to ensure before you go claiming any space in your home as a “home office”. The full details of the form are listed on the IRS website, but here are the basics.
You must answer “yes” to one of the following questions to be able to get tax benefits from the form:
- Do you use your home as the principal place of business for any of your businesses?
- Do you use your home as a place of business used by patients, clients, or customers to meet with you regularly?
- Do you use a separate structure (shed, garage, or building) in connection to your business?
If you own a daycare or use your business space to store product inventory, however, exceptions will apply.
It’s also important to qualify your home for a business by how much you use the space. Remember that you can use Bonsai tax to help with identifying tax deductions.
The IRS wants to ensure that you both use it “exclusively and regularly for administrative or management activities” related to your business and that you have no other place where you do a substantial portion of your work.
An example of this would be if you spent 40 hours a week or more doing project work in Starbucks because your house is too small; the IRS would consider the Starbucks to be your principle place of business, disqualifying your home. (Using a hotel room or temporary office space while traveling for business won’t disqualify you, however, since this is not where you do the bulk of your work.)
How to calculate your home office deduction
Since the main purpose of form 8829 is to get a business deduction that you can take from your total earnings – and decrease your taxable income – it’s important that you fill out the form to the best of your ability so that you get the maximum benefit possible. There are many fields on the form that require you to honestly provide details of your work set-up, including:
- The total square footage of your home
- The square footage of the space you use exclusively as a home office
- Expenses related to ownership and upkeep of your home, including: home repairs, deductible mortgage interest, property taxes, insurance, utilities, and home-ownership/maintenance fees
(Note that “office expenses” and “home expenses” are not the same. You’ll be able to claim the cost of things like office supplies and furniture on another form on your return, but these do not belong on form 8829. The home office expenses are restricted to just those costs associated with your home’s structure and upkeep.)
The form also has a place for a more complicated set of numbers, including your home’s depreciation and carryover of any unallowed expenses from prior years. Your tax advisor should be able to walk you through these issues, but most home business software providers also have appropriate questions addresses these, as well. Don't forget to follow the IRS form 8829 instructions when filling out the form.
Did you know that you can use Bonsai for bookkeeping? Or that Bonsai can help you be prepared for self-employment tax by providing tax estimates, filling date reminders, and identifying your tax write-offs?
Let's see how that works. First, head to your main Bonsai dashboard and have a close look on the left side - we'll be working with the accounting and taxes sections. First click on "Accounting".
Inside the accounting section, you'll see a breakdown of your income and expenses. Both can either be automatically imported from your bank account, or manually added. Work you got paid for via Bonsai will also be registered here.
Make sure this section is properly filled in and click on "Taxes" next.
This is where the magic happens: Bonsai will do all the calculations for you, and we'll provide you with an overview of your tax estimates, a list of tax deductions you can use for the upcoming tax season, and reminders for all the upcoming filling dates.
Simple, right? If you're ready to check out Bonsai and explore all the features, go ahead and sign up for the free trial!
Taking the simplified home office deduction
If any of the above made your head spin, you are not alone. In fact, the IRS took a surprising step in 2013 with the introduction of a simpler way to do the home office deduction. The move created a very no-fuss way to get a quick number to input on your tax forms, and saves an estimated 1.6 million hours of administrative work for taxpayers each year. As such, it works for a good number of freelancers who work from home with a modest (less than 300 square foot) office space.
This simplified home office method isn’t done on form 8829 at all, but rather on 6 lines of the Schedule C (discover more about how to fill out this form here. This method doesn’t change who qualifies for the deduction. The same rules apply as before regarding your exclusive use of the space and that you do most of your business there. Major highlights of this simplified method are as follows:
- Business owners can take a simple, standard deduction of $5 per square foot of their home office – up to a maximum of 300 square feet (or $1500.)
- Those home-related itemized deductions (such as property taxes) can still be taken in full on Schedule A.
- There is no additional home depreciation deduction or ability to recapture lost deprecation later.
Since this method eliminates an entire worksheet and form, it’s very popular among freelancers and those who prepare their own taxes. You can get even more info on this strategy on the IRS’ FAQ page.
Which method to use?
Is there any reason to go through the work of taking the more complicated home office deduction? For some, the answer is yes. For those with a very large home office, over 300 square feet, you may get more by itemizing. Daycare providers might fall into this category, as they tend to use a very large portion of their home for use, and it’s not all exclusive. Those who create in a separate structure – such as a workshop -- may fall into this “large” home office category, as well.
Of course, taking the more complicated deduction requires you to track every single expense, as well as document it. The simplified deduction gives you a flat rate, no matter what your expenses are. If you manage to not pay much for your office space, you may come out ahead with a large office that fall under the 300-square foot limit and is relatively affordable to maintain. The simplified method doesn’t ask for itemized examples of your cost, so there is much less recordkeeping involved, as well.
Try our free worksheet to track your home office deduction tax write-off amount manually.
Help is here
The good news is that you don’t have to figure things out alone. Whether you employ the help of a certified tax professional or use one of the many reputable online tax products out there, the home office deduction has been around long enough for the calculations to be reliable. It takes much of the guesswork away since this is a common form for people to be filing and professionals are used to seeing it. They should be able to try both methods and let you know which one will get you the largest deduction. If you improperly report on your taxes, this could trigger a home office deduction audit.
If you want to give your professional a hand, however (or make your time at the computer less painful), consider getting the following info together before you file:
- Square footage of both your home and home office
- Receipts from home-related expenses, such as utilities, repairs, taxes, and mortgage interest
- Answers to the questions regarding how much of our business you do at home and if it is exclusively set aside for that purpose
Can you change your mind?
While you are free to choose whichever method applies to you and saves you the most money, you can’t switch from one method to the other within the same tax year. What about from one year to the next? The IRS explains it this way:
“If you use the simplified method for one year and use the regular method for any subsequent year, you must calculate the depreciation deduction for the subsequent year using the appropriate optional depreciation table. This is true regardless of whether you used an optional depreciation table for the first year the property was used in business.”
The home office deduction is just one of many money-saving tools available to help you keep more of your income and avoid overpaying on taxes. By being prepared far in advance of tax time, you can prevent expensive mistakes. Start planning now for those details that will make April 15th a breeze!
Use Bonsai to manage your freelancing, import expenses, identify tax deductions, and estimate quarterly taxes - sign up for a free trial.
