Gig workers and independent contractors have lots of job perks. They have the flexibility to make their own schedule. They have the freedom to work as much—or as little—as they want. They also have the satisfaction that comes with being your own boss. But all that freedom and flexibility comes with some gray areas. None bigger than taxes.
For gig workers and independent contractors, taxes are often confusing. There are plenty of misconceptions as to what you can and what you cannot claim as tax deductions.
This blog post focuses on clearing up all the misconceptions about the taxes and the home office. With COVID still running rampant, more people are working from home than ever before. Let’s take a look at how home office tax deductions work for independent contractors and gig workers.
Who Is Eligible for a Home Office Tax Deduction?
For starters, only self-employed gig workers or independent contractors are eligible to claim a home office deduction on their 1099 form. Regular employees—even those working from home due to COVID—are not eligible to claim the home office deduction. As long as your home is your principal place of business, and you exclusively use a portion of your home for conducting business on a regular basis, you may use the home office tax deduction.
Here is a handy flowchart to help explain whether or not you qualify for a home office tax deduction.
How to Calculate Your Home Office Deduction
So, as a gig worker or independent contractor you meet the requirements for a home office tax deduction. What happens now?
The IRS allows two different methods for calculating your deduction:
The Simplified Method: This allows you to do a simple calculation for your deduction that is capped at $1,500 per year. It’s calculated by multiplying the allowable square footage of the home office using a prescribed rate. You can find more details on how to calculate it here.
The Detailed Method: This is calculated on an IRS Form 8829. It is calculated by your choice of area method (the percentage of square feet your home office takes up out of the total area of your home), or the Number-of-Rooms method, which is calculated by dividing the number of rooms used for business by the total number of rooms in your home.
What Records Should I Keep?
As a general rule, you should keep your financial records for three to six years, as the IRS goes back three years into your history during a tax audit, but has the power to go back further.
Here is a list of records you should keep on hand:
- Receipts: Keep receipts for any items you listed on your tax return as a business expense
- Brokerage statements: Hold onto these for any transactions reported on your tax return
- Sale of home or other property: Definitely keep these for a minimum of three years. If you have multiple properties such as an investment property or vacation home, hold onto those records as well.
- Income and expenses: Hold onto the records of any income or expenses reported for your small business on your tax return
Forever records: it’s best to hold onto certain records forever. These include tax returns, contracts, property deeds and closing statements, records of your contributions to retirement plans such as 401(k) and IRAs, life insurance policies, and estate planning documents such as power of attorney or trust agreements.
What Else Can Independent Contractors and Gig Workers Deduct?
Home office expenses aren’t the only thing that may be tax deductible. According to the IRS, gig workers and independent contractors may also be entitled to deduct:
- Mortgage interest
Have anything to add? Is there anything else gig workers and independent contractors should know for next tax season? Let us know!