If you are self-employed and work at home — even just part-time — you may claim a home office tax deduction for expenses related to your home office.
Alas, if you’re an employee who has been working from home since the COVID-19 pandemic, that amazing home office tax deduction you’ve heard so much about does not apply.
At a glance:
- Self-employed people can claim the home office deduction on their taxes if they meet certain IRS requirements.
- If you are a traditional employee who works from home, you cannot claim the home office deduction.
Can I claim the home office deduction if I work from home?
Unfortunately, traditional employees who work from home either full-time or part-time cannot claim the home office tax deduction to offset expenses related to their home office. The home office deduction you’re likely familiar with is only available to self-employed people or small business owners who work for themselves.
Since the pandemic, many companies have elected to provide home office stipends or financial support of some capacity for their employees if they work from home. If your company has not offered to cover any of your new home office expenses, our recommendation is to reach out to your HR department or direct boss to discuss the possibility of receiving assistance. It never hurts to ask!
While working from home is convenient and comes with various perks, the increased utility cost and the need to purchase equipment to work efficiently can be a strain on your bank account. We encourage you to start a conversation with your employer about how they could help offset some of those extra costs if you are a remote worker.
Can I deduct my home office supplies as unreimbursed employee expenses?
Tax reform in 2018 changed the home office deduction, including what traditional employees can deduct related to their work expenses. Before the Tax Cuts and Jobs Act (TCJA) went into effect in 2018, you could deduct unreimbursed job expenses that exceeded 2% of your adjusted gross income (AGI) on your federal income tax return using Schedule A. Sadly, that’s not the case anymore.
If you work at home as an employee — even for your employer’s convenience — you can no longer deduct your out-of-pocket expenses. As of 2023, there are no longer deductions for unreimbursed employee expenses.
If you’re self-employed, you can still claim the home office tax deduction for qualifying costs, whether you use the actual expenses or the simplified method. The home office deduction decreases your business income, and therefore, your gross income.
Qualifications to claim the home office tax deduction
In most cases, you may qualify to claim the home office deduction if you solely use a portion of your home for your business and nothing else. You just have to make sure your home office meets the IRS’s definition of a home office for tax purposes.
Home office definition
For your office to be considered a home office in the eyes of the IRS, you must use your home office area regularly and exclusively for your self-employed business. The office space must be your primary place of business or a separate structure used in connection with your business.
That being said, there is no requirement that your home office needs to be partitioned off from other areas with a wall or additional barrier. For example, if you have a desk in the corner of your living room where you conduct your business, you can still qualify for the deduction provided you don’t also use that specific area of your home for personal use.
Exceptions to the home office deduction
There are sometimes exceptions to the home office rules. For instance, in-home daycare businesses don’t have to meet the exclusive use test. To qualify for that exception, you must meet two different requirements:
- You provide daycare for children, people 65 years or older, or people who are physically or mentally unable to care for themselves
- You must have a license, certification, registration, or approval as a daycare center under state law (or you’ve been granted an exemption from needing one)
The IRS provides another exception for those who use their homes to store business inventory or product samples. To qualify for this exception and claim the home office deduction, you must meet all of the following requirements:
- You sell your products at wholesale or retail as your business
- You keep the inventory or samples in your home for business use
- Your home is your only business location
- You regularly use the storage space for business purposes
- You use an area that is separately identifiable as suitable for storage
Categorizing home office business expenses
Home office business expenses are divided into direct and indirect expenses.
Direct expenses are costs that only apply to your home office, such as furniture and equipment, supplies, and so on. You can claim 100% of direct expenses on your income tax return.
Indirect expenses are costs that don’t exclusively apply to your home business, such as utilities, rent, insurance, security system fees, and similar costs. To find the deductible percentage of these costs, you divide the total square footage of your home by the number of square feet in your home office.
How to calculate the home office deduction: The simplified method
If crunching the percentage numbers for your business expenses sounds like a lot of work, you can use the simplified method to determine your home office deduction instead.
The IRS offers taxpayers a simplified method to make your home office deduction calculation easier. With the simplified method, you deduct a flat rate per square foot — for tax year 2023, that would be $5 per square foot for up to 300 square feet. You can choose between the simplified method and tracking actual expenses each year.
The simplified method is still only available to self-employed people (like independent contractors or freelancers) who run their businesses from home. As we discussed earlier, traditional employees who work from home cannot claim these home office expenses as deductions on their federal income tax returns.
Will claiming the home office tax deduction increase my chances of a tax audit?
Taking the home office deduction does not significantly increase your chances of being audited. While claiming this tax deduction doesn’t make an audit more likely, it’s always essential to keep good records. File away all of your receipts for safekeeping, so you have them as a backup for proof in the event of an audit. A good rule of thumb is to keep excellent records of your income and expenses — down to every last penny spent or earned. That way, if the IRS does come knocking, you’ll have the paperwork ready to back up your claims.
