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When the coronavirus pandemic surged through the US in March 2020, the vast majority of employees who could work from home gathered up their stuff and left the corporate office behind. The shift was seismic: A formerly slow-growing population of full-time remote workers that had numbered approximately 23.7 million in January 2020 swelled to roughly 37 million by year’s end, according to Bryan Bassett, senior research analyst at IDC.
If you’re one of those freshly minted home workers, you may be wondering about the tax impact of your own work-from-home situation — and wondering whether you can take advantage of the vaunted home office deduction. The short answer: maybe. In fact, the rules are dramatically different for corporate employees and self-employed workers. And it also depends on where you actually work. Are you camped out in a dedicated home office space or sitting at your dining room table? To the IRS, that matters.
If you’re looking to figure out if you’re eligible to claim it, here’s everything you need to know about the home office deduction.
Note: It’s always a good idea to consult a trusted tax advisor or tax software service to get the specifics for your particular situation.
What is the home office deduction?
At the most basic level, this deduction lets you reduce the amount of taxes you owe by claiming the space in your home that’s dedicated to working as a business expense.
Read more: How to claim work expenses on your 2021 taxes
Who can claim the home office deduction?
Though millions of people are now working from home due to the coronavirus, only a specific subset of them can claim the deduction. At a basic level, if you are self-employed — that is, if you work for yourself, set your own hours or own a small business — you are probably qualified to claim this deduction. According to the IRS, these three worker categories are technically eligible:
- Self-employed
- Independent contractor
- “Gig economy” worker
Are full-time W-2 employees working from home eligible?
They are not. In 2017, the Tax Cuts and Jobs Act suspended tax write-offs for home office deductions through 2025. That means if you are an employee who gets a W-2 from an employer, you are not eligible for the home office deduction — even if you’re working from home.
Note that this could change at some point — almost certainly not in time for your 2020 taxes — but perhaps next year, if Congress decides to provide additional tax relief in future COVID-19 legislation. After all, remote work isn’t going away: Gartner says that 48% of employees will likely work remotely at least part of the time, even after the pandemic.
Read more: Our favorite home-office essentials for 2021
What types of office spaces are eligible?
Once you determine that you’re eligible for the deduction, you must evaluate whether your home office fulfills the requirements. First, it needs to be the primary space where you work; if you rent office space somewhere else, your home office isn’t tax-deductible. Second, the space needs to be dedicated to working; if you eat at your kitchen table and you work at it, technically, it does not qualify.
You can claim the deduction whether you rent or own your home, and regardless of whether you live in a house, apartment or condo. You cannot claim it, however, if you’ve been holed up for the past year in a hotel room or other temporary housing. There are a few loopholes for in-home service providers and business owners who store inventory at home.
Will the IRS take a harder look at the use of this deduction this year?
It’s hard to say, according to Garrett Watson, senior policy analyst at the Tax Foundation, though he says that a W-2 employee claiming the deduction with no other income has a greater chance of getting flagged. “For self-employed filers, it will be more challenging for the IRS to catch improper use, though the agency does use several tactics including checking to see if this a new deduction to narrow in on potential issues.”
Are there downsides to the home office deduction?
The major drawback isn’t specific to the deduction itself — but rather the dreaded self-employment tax. If you work for yourself or own your own small business, you’ll be taxed at a rate of 15.3% on the first $137,700 of your combined wages, tips and net earnings. And the threshold is low: If you earned $400 or more from self-employment during 2020, you’re on the hook for paying this tax.
If you want to plunge into the weeds of claiming the home office deduction (and other business expenses), check out IRS Form 8829. But any good tax software package will walk you through the process of claiming the office home office deduction — and a host of other tax deductions — including those related to health insurance premiums and retirement savings. And there are more details about the specifics — including exactly how to calculate your home office deduction — on the IRS website.
Read more: How to estimate your tax refund: Tips, calculators and more