Overview

Many people who run a side hustle from home can use the home office deduction to reduce taxable income, but the IRS sets firm rules. The deduction is available primarily to self-employed taxpayers and certain small-business owners; it is generally not available to employees for tax years after 2017 (see limitations below). Two claiming options exist: the simplified method and the regular method (actual expense allocation). For authoritative guidance see the IRS home office page and Publication 587 (Business Use of Your Home) (https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction; https://www.irs.gov/pub/irs-pdf/p587.pdf).

In my practice advising side-hustlers, I see three recurring mistakes: confusing employee vs. self-employed eligibility, sloppy documentation of exclusive use, and choosing the wrong calculation method. Fixing these avoids audits and missed savings.

Key IRS qualification rules

To claim the deduction, the IRS requires all three of these tests (summarized):

  • Exclusive use: You must use a specific area of your home only for business. Occasional personal use disqualifies that space.
  • Regular use: The business use must be ongoing and not incidental or occasional.
  • Principal place of business: Your home must be the main location where you conduct administrative or management tasks, or you meet clients there. If your side hustle has no other fixed location for business management, this test is often met.

These are explained in Pub. 587 and the IRS home office guidance (IRS, Business Use of Your Home).

Important eligibility notes:

  • Self-employed individuals and sole proprietors (Schedule C filers) routinely qualify if they meet the tests. Claim the deduction on Schedule C. Use Form 8829 for the regular method to report allocated expenses; use the simplified method calculation and report it on Schedule C (see IRS guidance).
  • Employees (people who receive a W-2) generally cannot claim an unreimbursed employee business expense for a home office for tax years 2018–2025 because of the Tax Cuts and Jobs Act suspension of miscellaneous itemized deductions. There are limited exceptions (armed forces reservists, certain performing artists, qualified educators, etc.). See the IRS page for details.

(IRS: Home Office Deduction; Pub. 587)

Two ways to calculate the deduction

1) Simplified method

  • Rate: $5 per square foot of qualified home office, up to 300 sq ft (maximum $1,500).
  • No depreciation, no separate allocation of utilities, mortgage interest, or insurance.
  • Easier recordkeeping; practical for rooms under 300 sq ft and when the regular method yields only slightly higher savings.

Example: If your dedicated home office is 150 sq ft, simplified deduction = 150 × $5 = $750.

2) Regular method (actual expenses)

  • You calculate the percentage of your home used for business (business square footage ÷ total home square footage) and apply that percentage to indirect expenses (mortgage interest, property taxes, utilities, homeowner’s insurance, general repairs).
  • Direct expenses for the office (painting that office, repairs only in that room) are fully deductible.
  • You can also claim depreciation for the business portion of the home.

Example: Home 1,200 sq ft; office 150 sq ft = 12.5% business use. If total eligible home expenses (mortgage interest + utilities + insurance + qualifying repairs) = $10,000, the deductible indirect portion = $10,000 × 12.5% = $1,250, plus any direct expenses.

Use Form 8829 to compute and report the regular-method allocation; see IRS Publication 587.

Income limits and carryover rules

The home office deduction is treated as a business expense and cannot create or increase a deductible net loss from the business for the year if your side hustle does not generate profit. For the regular method, if the home office deduction is limited because of business income (i.e., it would create a loss), the disallowed portion may be carried forward to future tax years until you have sufficient net profit to use it (see Pub. 587). The simplified method automatically limits the deduction because it is a straightforward calculation that will not create special carryovers.

Common real-world examples (practical and numeric)

  • Freelance copywriter: Uses a spare bedroom (200 sq ft) in a 1,600 sq ft house. Simplified = 200 × $5 = $1,000. Regular method: business-use percent = 12.5%. If eligible annual home expenses = $8,000, deduction = $1,000 (same as simplified).

  • Etsy seller: Uses a 100 sq ft dedicated studio in a 1,000 sq ft rental. Simplified = 100 × $5 = $500. Regular method: 10% of rent, utilities and renter’s insurance plus direct studio repairs.

These examples show why you should calculate both methods in a typical year to see which is more favorable.

Documentation and audit preparedness

Good documentation is the best defense and the fastest path to getting full value from the deduction.

Keep all of the following for at least three years (IRS recommends keeping records until the period of limitations expires):

  • Floor plan or measurements showing total home square footage and the office area.
  • Receipts and bills for mortgage interest, property tax, rent, utilities, insurance, repairs, and improvements.
  • A contemporaneous log of hours and activities if you meet the regular use or principal place tests by time spent.
  • Evidence of business activity: invoices, contracts, bank deposits, and advertising.

If you want deeper tips on what the IRS commonly checks in small-scale home office audits, see our guide on what the IRS looks for in audits (internal link: What the IRS Looks for in Small-Scale Home Office Audits: https://finhelp.io/glossary/what-the-irs-looks-for-in-small-scale-home-office-audits/).

Depreciation and sale of your home

If you use the regular method and claim depreciation for the business portion of your home, that depreciation reduces the home’s tax basis. When you sell the home, the depreciation you claimed (or could have claimed) may be subject to recapture and can increase the taxable portion of any gain. In short: depreciation can create tax on sale even if you otherwise qualify to exclude gain under Section 121. Consult a tax advisor before taking depreciation if you plan to sell soon.

Mistakes that cost money

  • Claiming space that isn’t exclusively used for business (e.g., a bedroom also used for guests).
  • Forgetting the employee-eligibility rule and filing as a W-2 employee expecting to take the deduction.
  • Failing to track square footage or mixing up direct vs. indirect expenses.
  • Using inconsistent descriptions of the office space in records and tax returns.

Practical tips I give clients

  • Measure carefully. Use a tape measure or digital floor plan; calculate the percentage two ways (square footage and number of rooms) and use whichever most accurately reflects use.
  • Run both calculations each year. The relative value of simplified vs. regular can change with mortgage rates, utilities, and renovations.
  • Track direct expenses separately—these are fully deductible under the regular method and are often overlooked.
  • If you start as an employee and later become self-employed, keep records from day one; retroactive documentation is hard to rebuild.
  • Consider a written home office policy or lease if you run a business entity (LLC/C-corp) that reimburses employees for home office costs—this helps substantiate business purpose.

How to claim the deduction on your return

  • Self-employed (Schedule C filers): Simplified method — calculate $5 × business-square-footage (≤300 sq ft) and enter the amount on Schedule C; Regular method — complete Form 8829 to compute and report the deduction.
  • Partnerships/S-corps: The rules differ when an owner’s home is used for business; consult a tax advisor to structure reimbursements or accountable plans.

When to consult a tax pro

Talk to a CPA or enrolled agent if any of the following apply:

  • You claim depreciation for the home office and expect to sell your home within several years.
  • You have multiple businesses or an LLC that pays you for home-office use.
  • The space’s exclusive and regular use is borderline (shared family room, dual-use spaces).
  • You received an IRS notice about your home office deduction.

Our guide on the differences between the simplified and regular methods gives step-by-step examples if you want a deeper walkthrough (internal link: Home Office Deduction: Simplified vs Regular Method Explained: https://finhelp.io/glossary/home-office-deduction-simplified-vs-regular-method-explained/).

Final takeaway

For side hustlers, the home office deduction can be a meaningful tax benefit when the IRS tests are met and proper records are kept. Use the simplified method for ease and smaller spaces; use the regular method when you have large eligible home expenses or when depreciation creates additional long-term tax strategy concerns. Calculate both ways each tax year, document carefully, and consult a tax professional when depreciation, business structure, or sale-of-home issues arise.

Disclaimer: This article is educational and based on current IRS guidance (2025). It is not tax advice. For advice tailored to your facts, consult a qualified tax professional or CPA.