Tax Liabilities and Deductions for Business Uses of Your Home
By S.M. Oliva | Reviewed by Canaan Suitt, J.D. | Last updated on June 24, 2025 Featuring practical insights from contributing attorney Joseph B. Darby, III“I used to tell people not to say, ‘I work in my home.’ Say, ‘I work in office space located in my home.’ The difference could be thousands of dollars in federal tax deductions,” says tax law attorney Joseph B. Darby III.
Technology has made home-based small businesses a popular alternative for many residents looking to leave the traditional job market and strike out independently. While starting a home-based new business is not necessarily complicated, certain tax issues need to be considered.
Personal Income and Home Business Taxes
Home-based small business owners will likely be a sole proprietorship or limited liability company (LLC). For purposes of federal income taxes, neither type of business structure is separate from you.
Any business income you make as a sole proprietor or an LLC member should be reported on your personal tax returns (usually on Schedule C). Since you are self-employed through your home business, you must also pay the full federal Social Security and Medicare taxes on your income. This is known as the self-employment tax and amounts to 12.4 percent for Social Security and 2.9 percent for Medicare. On a positive note, 50 percent of your self-employment tax can be a deduction.
Other Tax Obligations for Home-Based Business Owners
Income taxes are not the only taxes a home-based business owner may need to deal with as a taxpayer. If you hire employees, you will need to pay for unemployment insurance, workers’ compensation insurance, and additional Social Security and Medicare taxes. If your business sells tangible goods, you may need to collect state sales taxes. And depending on where your home is located, you may be subject to additional local taxes and licensing fees.
Should you move from your home and seek a new one, it would require a 1031 exchange. Or, if for some reason you cease to use your home for business activities, “What then happens is all that depreciation you got over the years comes back and gets taxed at that time,” Darby says.
The Internal Revenue Service (IRS) red flags home offices and the Form 8829 (Expenses for Business Use of Your Home) because they’re commonly abused, Darby adds. This may result in increased instances of tax audits within a tax year, so it’s important that it be done correctly. “Some people are a little skittish about filing an 8829, but to my mind, as long as it’s being done carefully and prudently, it makes your business seem more legitimate,” Darby says.
I used to tell people not to say, ‘I work in my home.’ Say, ‘I work in office space located in my home.’ The difference could be thousands of dollars in federal tax deductions.
Can I Deduct the Costs of My Home Office?
The IRS permits a home-office deduction for any portion of your residence that is used “exclusively and regularly” as your “principal place of business.” What does this mean? If you have a dedicated room in your house or apartment that is for business use, you can deduct the costs associated with that portion of the residence as a business expense.
“You may see ‘exclusive’ as somewhat of a problem since the kids may be running in, or you sometimes use the office for something else,” Darby says. “However, in my experience, the IRS hasn’t been super tough about it so long as it’s the principal place where you carry on your business.”
The home office deduction is typically done on a square-footage basis. “Say, one room of the house, or a portion, like half the living room. So if it’s one-eighth of the size, you deduct one-eighth of the costs,” Darby says. This can include monthly rent or mortgage payments, taxes, and utilities like electricity and heating. Other expenses may be exclusive for business purposes and can be written off or deducted, such as a new desk, office supplies and gas mileage. “Every dollar saved is a dollar earned,” says Darby, who has claimed such expenses himself when he was a self-employed writer.
The Importance of Recordkeeping for Home-Based Business Owners
“Above all else, keep good records,” says Darby. “The one bugaboo for anyone self-employed is they don’t keep track as well as they should. Most are pretty simple: You have to pay your tax bill four times a year and your mortgage once a month, and subtracting one-eighth, or whatever the percentage is, isn’t that big of a deal.
“But for other things, I recommend the shoebox method: Take all your expense receipts and throw them in a shoebox to add up at the end of the year. Most people aren’t likely to keep an ongoing daily set of books as readily as a shoebox. You can sit down and do your records at one time instead of regularly maintaining them over the course of the year.”
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