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Taxes for 1099 workers, part 2: the home-office deduction

In the first part of this post, we noted what a hassle it can be to take care of taxes as a freelance worker. Figuring out self-employment tax can be complicated - and it's easy to fall behind on making the estimated tax payments you're supposed to make quarterly.

If you have a home office, another thing you have to figure out is whether to take the home office deduction. Should you take it and how does it work?

Knowing the answers to these questions is important because if you claim the home-office deduction when you shouldn't, it can increase the chances of a tax audit.

Three years ago, in tax year 2013, the IRS adopted a simplified method for claiming the home-office deduction. (Tax year 2013 refers to returns filed in 2014.)

The simplified option did not change the eligibility criteria for the deduction. To take the deduction, you must use a portion of your residence exclusively for business purposes and do so on a regular basis.

There are a couple of exceptions to the requirement that the space be used exclusively for business. One is for home daycare operators and the other for people who use a space in their residence to store product inventory or samples.

Generally, however, the space set aside for the office has to be used exclusively for work in order to claim the home-office deduction.

The simplified calculation for the deduction is based on allowing the deduction of $5 per square foot of a residence used for business purposes. The regular method involves calculating actual expenses for the percentage of the home that is used for business.

This means that you actually have two choices regarding the home-office deduction. One is whether to take it. The other is which method to use to calculate it.

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