When you’re running your own business, one of the best things you can do is create a home office for yourself. A home office can be inside your home or in a separate structure on a property that you either own or rent. Even if your business isn’t profitable right now, the tax benefits that come from having a home office can carry over until you are profitable and that can ease some of your future tax burden. Here are some of the additional pros and cons of creating a home office for freelancers, telecommuters, and the self-employed.
The Pros of Having a Home Office
1. You replicate an office environment at home.
Distractions at home can be cumbersome when you’re trying to get some work done. By creating an office that is away from your television, your video games, and your other entertainment options, you’ll be able to better focus your mind on work. You’ll still need the willpower to stay off of Facebook or Twitter, of course, but a home office is a great way to limit costly distractions.
2. You get a deduction for all of your expenses.
Let’s say that you are a renter. You establish a home office in one room of the home and it’s 120 square feet. The home itself is 1,200 square feet in size. This gives you the opportunity to deduct 10% of your living costs as a business expense under the current US tax code – including the rent that you’re paying. It doesn’t even matter if you live in an apartment. As long as the home office is the principal place where you do business, then you get this deduction.
3. Telecommuters also get a deduction.
If telecommuting is required by a traditional employer, then you receive a similar tax deduction when you create a home office. This applies only if your employer doesn’t cover the costs needed for this requirement. If you have to pay to establish a VPN, purchase a specific computer, buy a desk, or need other items, then these expenses become work-related needs that you can deduct at the end of the year.
4. You get to be in more control of your hours.
This is likely the biggest benefit of having a home office. When you can work at any time, then you have more control over when and how you work. Want to spend some time with the kids today and work after they go to bed? You can do that when you own your business and work from home. The amount of flexibility is very attractive and a primary reason why the freelancer market is exploding right now.
5. It creates a professional/personal boundary.
Although you’re working from home, a home office helps to create a boundary between your personal life and your professional life. It helps to change your mindset one you step into your office to get to work. The benefit is that you don’t have to deal with a rush-hour commute to reach that mindset. You just have to step into your office.
6. You can work in your pajamas.
You’re at home by yourself. There is no dress code required. Want to work in your bathrobe? Do it. Want a pajama day? Take it. You get to make yourself as comfortable as you want to be.
The Cons of Having a Home Office
1. You’re in charge if something goes wrong.
Let’s say there’s an issue with your internet connection. It’s up to you to solve the problem. This means taking the time to talk to your ISP, potentially scheduling a repair, and this is time where you’re not earning money. If something goes down at work with a traditional employer, you kick back and still earn your paycheck. At home, you’re not earning anything until you solve the problem that is limiting your productivity.
2. It takes money to make it happen.
You’ll have to make an upfront investment into your home office in order to create it. That might mean purchasing a computer, an office chair, a desk for your computer – even a coffee pot becomes a business expense you may need. All of those extras that employers tend to provide, from free coffee to a paid lunch break, disappear when you’re working out of a home office in may instances. Many workers don’t mind trading these things for the freedom to work at home, but some might take issue with it.
3. You’ve got to file a bunch of paperwork.
Under the current tax code in the US, anyone that you pay more than $600 for services rendered requires you to file a 1099 form. If you subcontract some of your work to other independent contractors, this will require you to keep comprehensive financial books to make sure that you’re in compliance with the current tax code. That means making a time investment where you don’t get paid or it means spending the money on an accountant to represent you.
4. There are still distractions that can limit your productivity.
So the TV is in the next room, but there’s a basketball game on that you’ve really been wanting to watch. It’s not that difficult to go into the next room, turn on the TV, and plunk yourself down on the couch with some snacks. You might even justify the choice by saying you’ll go back to work on the commercial breaks. The fact is that distractions are always around at a home office. The neighbors might start yelling at each other. The dogs want a walk. There’s ice cream in the freezer calling your name. No one has the willpower to ignore all of these distractions 100% of the time every day.
5. People who operate from a home office tend to work longer hours.
When work is always available to do, people tend to sit down and do it at a home office. You’re never really away from the work when you’re at home, so you must discipline yourself to keep your personal time in place. Still… if you’re putting in 50 hours per week at a traditional office, be prepared to put in 65 hours per week at the home office or be prepared to ignore the feeling that you aren’t as productive as you could be.
6. Not every home office qualifies for a home deduction.
What’s worse is that some zoning regulations may negate the ability for you to even have a home office in the first place. If you only do occasional work in your office or you’re not allowed to have one at all, then you may not qualify for a tax deduction on the costs you have to establish and maintain it. Before getting started, it is a good idea to check local zoning laws, state requirements, and licensing issues to make sure you are in compliance with all expectations.
These home office pros and cons show that you can control the direction of your life a little better when one is in place, but you’ve got to have enormous levels of willpower to make that happen some days. If you don’t mind giving up your sick days in exchange for the ability to work in your pjs, then establishing a home office could be right for you.