What You Need to Know About Working From Home

Today, technology makes it easy for anyone to start and run a business from home. Before you invest time and effort in a home-based activity, make sure you understand legal and tax aspects, as well as practical considerations, so you can avoid problems later on.

Deciding to work from home

Starting and running a business from home can provide many personal and financial benefits: You can see to family responsibilities (e.g., child or parent care) while making money from your business. You eliminate commuting, saving you time and money. And you avoid costly overhead for commercial space (you’re already paying the costs for your home). But don’t assume that running a business from home is for everyone.

Before committing to working from home:

  • Make sure you have adequate space to accommodate your business activities (including a storage area for inventory if you’re selling products). You need a separate area for business-not only to work effectively but also to claim a home office deduction (explained below).
  • Be prepared to give up some privacy if the nature of your business entails having customers come to your residence.
  • And, unless you live alone, make sure your family or roommates will cooperate to give you the space and quiet you need for business.

Keeping it legal

Even though you’re in your personal dwelling, you still need to comply with local, state, and federal rules when you run a business there.

  • *Check local zoning rules. *While consultants and freelance writers probably won’t have any problems with their towns and cities, those who want to operate businesses that could involve noise, smells, or traffic may be a problem. Also check whether you’re permitted to post a sign (and if there are any size restrictions) and if there are any parking restrictions that could affect customers who come to you.
  • Obtain licenses and permits. Tradespeople may need licenses from their localities; professionals and others need state licenses (there are even some businesses that require federal licenses). To determine whether you need a license for your business, go to Business.gov (** http://www.business.gov/register/licenses-and-permits/* * ) and click on your location.
  • Obtain business identification numbers. Sole proprietors with no employees can use their Social Security number for federal income tax reporting, but corporations, other types of business entities, as well as sole proprietors with employees and/or a qualified retirement plan, need an employer identification number (EIN). Obtain this online from the IRS (* www.irs.gov/businesses/small/article/0,,id=102767,00.html* ). You may also need identification numbers from your state (e.g., if you pay unemployment insurance for any employee, including yourself).
  • Obtain a sales tax number. If you sell goods and services in a state that requires you to collect sales tax on your transactions, you’ll need a resale number to report your collections. Contact your state finance or revenue department for details. *Good news: *If you have a resale number, you won’t pay sales tax on items you purchase that you intend to sell to your customers.
  • *Entity selection. *Many people who start a business from home do so as sole proprietors. If you use a fictitious name for the business, be sure to file with your city or county that you are “doing business as” (DBA) under the fictitious name. You may wish to formalize your business structure, even if you work alone, by becoming a limited liability company or corporation so you gain personal liability protection (creditors won’t be able to reach your personal assets even if they have a successful claim against the business).
  • *Insurance. *Be sure to have adequate coverage to protect you. Don’t assume your homeowners (or renters) policy covers the business you run from home. You may need additional protection for your business property, including any inventory you store at home, as well as liability protection in case a business guest is injured on your premises. Add a rider to your existing policy or obtain a separate business owner’s policy (BOP) for your protection. Talk with an insurance agent to learn the best course of action.

Taking your deductions

Working from home may entitle you to a home office deduction. This tax write-off is the portion of the personal expenses of your home that relate to your business. For example, if you use 10% of the space in your home for business, then 10% of utilities, insurance, mortgage interest and real estate taxes (or rent), and other expenses make up the home office deduction.
To qualify for a home office deduction, you need to meet two tests:

  • You must use the space at home as your principal place of business or as the location for doing administrative work if you have no other fixed location (e.g., you are a decorator who works at client’s locations but uses a home office for scheduling appointments and keeping your books). *Caution: *If you have another location-an office in town or a storefront-and use the home office for extra work, you may not be able to claim a home office deduction. *Exception: *The home office qualifies if it’s used to meet with clients, customers, or patients in the normal course of business (e.g., a professional with a downtown office who uses her home to meet clients after hours).
  • The space must be used regularly and exclusively for business. A spare room devoted as office space is fine; using the kitchen table won’t do

The annual write-off for a home office is limited to the gross income generated there. If you’re having a bad year, excess amounts of the home office deduction can be carried forward and used.

*Note: * Many are concerned that claiming a home office deduction is a red flag to the IRS. Reality: No one knows for sure. As long as you meet the eligibility requirements, don’t waste the deduction.
*Related benefit. * Once you establish that you’re eligible for a home office deduction, you can write-off the cost of travel from and to home for business. Keep track of any business use of your personal vehicle to see customers and vendors or to buy supplies.

by Big Ideas4Biz

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One thought on “What You Need to Know About Working From Home

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