It’s a real bonus as a freelancer to be able to work from home. No commuting, no office politics, and you can often set your own hours of work. Another bonus is being in control of your self employment taxes and able to claim tax deductions for a home office.
There are expenses to setting up and maintaining an office at home, from the initial purchase of computers and office equipment to the ongoing homeowner costs of house insurance, utilities and more.
The good news is that some of your home expenses can be used as tax deductions for a home office, helping to offset how much you pay at tax time, and increase your profits for the year.
Let’s take a look at everything you need to know about tax deductions for a home office.
If you would like an app to help you track your home office tax deductions and other write-offs, try Bonsai Tax. Our app helps save freelancers an average of $5,600 from their tax bill. Our software just works. Try a 14-day free trial today.
In order to claim tax deductions for a home office, the Internal Revenue Service (IRS), the federal taxing authority, does have some requirements.
The first requirement is that your home is your principal place of business. In other words, your office is located in your home and that’s where you do most of your work. If you do conduct business elsewhere, you could still qualify for tax deductions for a home office as long as you use your home “substantially and regularly to conduct business,” in the words of the IRS.
The second requirement is that you regularly use a part of your home exclusively for your business. For example, you have a spare room that has been converted into an office, or a garage that has been converted into a studio, and you use that space for your freelance business. Due to the COVID-19 pandemic, many employees could qualify for a home office reimbursement as well.
Even if you conduct some of your work elsewhere, you would still be able to deduct expenses for that part of your home used exclusively and regularly for business. As well, if it’s not the only place you meet clients, or the main place you conduct business, it can be used as long as it is used exclusively and regularly for business.
Here are some other scenarios.
Let’s say you work as an employee and are a part-time freelancer who uses a home office. You can use the tax deductions for a home office even if you’re at your employer’s office most of the time. That’s because the home office is the principal place of your freelance business, not your principal office where you spend all your time.
If you use the home office to do most of your administrative work, but your freelance work is done elsewhere - examples include in-person photography shoots or on the road doing sales - you’re still eligible for home office deductions.
You’re also eligible for tax deductions for a home office whether you own or rent your home, and for any type of home, including a house, apartment, condominium, or even a houseboat.
If it’s simply helpful to have an office in your home that you occasionally use for business, but usually the kids are in there doing homework, then you can’t claim tax deductions for a home office. It might be best to seek advice at the outset.
Did you know that you can use Bonsai for accounting? 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 taxes 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!
The IRS outlines two ways to claim tax deductions for a home office:
Here are a couple of examples to explaIn the two methods.
In the simplified method, you take the square footage of your office, to a maximum of 300 square feet, and multiply it by $5 to get your deduction. That means you’ll get a maximum deduction of $1,500. But you don’t have to document expenses and keep records.
In the actual expense model, if you perform an upgrade to the office itself, such as paying a builder to make a partition or wall that forms the discrete office space, that could be considered a direct expense and could be used in full as a deduction.
But the cost of maintaining and running the entire home, such as home insurance and utilities, would be considered indirect and would be deductible based on the percentage of your home that’s used as a business space. And the costs for other areas of your home, like painting your kitchen, would be considered unrelated expenses and not eligible to use as a deduction.
Which method you choose could be dependent on the size of your office, the size of your business operation, and whether the time it takes to track those actual expenses is worth it in the end. You need to ask, would your tax deductions for a home office be greater than the $1500 of the simplified method?
If you decide to take the actual expenses route, you’ll need to do some math to start, and then keep meticulous records of your home expenses.
First you’ll determine what percentage of your home is used as office or business space.
For instance, if your office is 200 square feet, and your home is 2000 square feet, the percentage dedicated to your office would be 10%: 200 square feet ÷ 2000 square feet = 0.10 (10%)
Then you’ll track the indirect expenses, against which you’ll apply the percentage to arrive at your tax deduction. Examples include:
You’ll also want to track direct expenses. Examples include:
You can also use mortgage interest and property taxes as tax deductions by converting part of them from personal itemized deductions to business deductions.
If you own your home, you may also be able to claim a deduction for depreciation. This is another consideration when deciding which method to use for claiming tax deductions for a home office. That’s because the depreciation is subject to capital gains tax if you sell your home.
If you use the simplified method, you may not be subject to that capital gains tax because depreciation doesn’t come into play with that approach.
An important takeaway from all of this is that it’s best to keep records of all your expenditures, such as electricity bills, just in case the IRS ever questions your expenses. It’s the same as tracking other types of tax deductions, like office supplies, special software, business licenses and professional development costs, to name a few.
It’s also good to remember that whether you qualify for tax deductions for a home office is determined each year. While you may or may not be eligible this year, it could change in the next tax year, if your business situation changes, or you move your freelance business to a different office space.
And while it seems like a lot of math at the outset, if the situation remains the same, you should only have to do the calculations once, and enjoy the tax savings every year. If your office square footage remains the same, your business situation is constant, and your expenses are relatively consistent, it should become routine to file your taxes with the correct forms year after year.
Finally, don’t worry that claiming tax deductions for a home office will raise a red flag with the IRS. It's a myth the home office deduction will trigger an audit. Anyone can be audited at any time, but if you follow the rules and keep records, you should be fine. It’s best to take advantage of what’s provided to freelancers to boost your profits and lower your taxes.
Let Bonsai make taxes easy for you - sign up for a free trial and see for yourself!
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?