As a gig economy independent contractor in Delivery (Doordash, Grubhub, Uber Eats, Instacart etc) and Rideshare (Uber, Lyft, etc.), it's hard to know what you can write off outside of miles and a few minor supplies.
You may have heard other drivers tell you that you can take several hundred dollars in home office deductions.
Is it true? Can you really write off your home office deduction for gig economy work?
Is there a danger? Can you get in trouble for taking a deduction that may not apply to your type of business?
We'll take a look at the home office deduction, especially in light of the type of work one does as a delivery or rideshare contractor. In this article we'll talk about:
- What is the home office deduction?
- What are the qualifications for taking the home office deduction?
- How does gig economy delivery and rideshare work relate to the home office deduction?
- How does the home office deduction work if you do qualify?
- What is the risk of claiming the home office deduction as a delivery or rideshare contractor?
Please note: I am not a tax professional and this article should not be used for tax advice. My goal here is to research information related to this topic, and present it in a manner that relates to gig economy work. For specific answers and advice related to your own situation, you should seek your own tax professional. Also note that this only relates to the United States of America tax code. Other countries may treat this topic differently.
What is the home office deduction?
If you are using part of your home to conduct your business, the IRS makes allowances to claim expenses for the business use of your home.
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes.Internal Revenue Service Home Office Deduction page.
Of course, most of us in the gig economy are familiar with the ability to write off the business use of our car. Either by claiming a flat rate standard mileage rate or by tracking the business percentage of the actual cost of using your car, you have an accepted way to determine how much of the use of your car was for business.
The IRS has essentially done something similar with the home office tax deduction. They've created a flat rate method or a more complex actual cost method. The home office deduction is a tax break allowing self employed small business owners to claim a portion of the cost of your home as a business expense. If you use a part of your home regularly and exclusively for your business, you may qualify to use this deduction.
The home office deduction is only for business expenses. It is currently unavailable for employees. The Tax Cuts and Jobs Act eliminated the tax deduction for home office use for employees and for other unreimbursed employee business expenses for tax years 2018 through 2025.
This deduction is intended the business portion of costs related to your home. It is not the same as claiming home office expenses such as office furniture or supplies. You would instead write those off in the appropriate expense category on your Schedule C.
What are the qualifications for taking the home office deduction?
If you were paying attention, you may have noticed that we gave this away a couple of times. You may have noticed a very important phrase:
Regular and Exclusive.
In order to claim a home office, that space has to be regularly and exclusively used for your business.
Exclusive: The space can only be used for your business activities.
The IRS is very firm on this one.
If you're doing your business work on the kitchen table, and that table is used for other purposes (like eating on) it cannot be claimed as a home office.
If you have a computer and a desk set up, but the computer is also used for gaming and personal use, it cannot be claimed as a home office.
In order to claim the home office deduction, the space you use can ONLY be used for business purposes.
Regular: The space must be used regularly as the principal place of business.
The home office has to be substantially and regularly used as the primary place of business.
Unfortunately the IRS doesn't exactly define “regular use” of your home. Does an hour a week count? About the closest thing to a definition I could find was the following excerpt:
Regular use means that you use the exclusive business area on a continuing basis. The occasional or incidental business use of an area in your homme does not meet the regular use test even if that part of your home is used for no other purposeExcerpt from an IRS audit manual as published by the Bradford Institute.
What makes this tricky is that the IRS does not require ALL of your business be performed there. For example, if someone runs a plumbing business out of their home, most of their work is performed at the client's location. But as long as the administration of their business is performed at the home office and it's a base of operations, the home office qualifies.
The best explanation of “regular use” was this article from the Bradford Institute. In the end, they made some recommendations:
- Keep documentation of the work performed at home. Keeping a log of times and frequency can be helpful.
- “To ensure compliance with the home-office rule that requires regular use, make sure that you use your home office an average of 10 hours a week or more.
Carter Suethe, CEO of Credit Summit, told me that “The definition of regular requires that the use of the home office be repeated and scheduled as well as reasonably frequent, though the exact frequency is a bit of an open question. At a bare minimum, your home office should be used multiple days of every work week on a regular schedule.”
How does gig economy delivery and rideshare work relate to the home office deduction?
Based on the IRS “regular and exclusive” requirements, my take is most gig workers are going to have a tough time justifying the home office deduction.
Administrative work is not a big part of driving for Uber or Lyft. We don't typically have reports or paperwork that we have to file when delivering for Grubhub, Doordash, Instacart, Uber Eats or other food delivery services. Almost everything is handled on the driver app.
Book keeping is minimal. The vast majority of record keeping most of us need to do involves tracking miles. That's typically done in our cars and often done with a GPS mileage tracking app.
In fact, even the book keeping is often done on the phone with popular apps like Hurdlr or Quickbooks Self-Employed. One of the more popular tracking apps, Stride Tax, doesn't even have a web interface and can only work on the phone.
If the bulk of your administrative work is performed on your phone, you may not be able to convince an auditor that the office space is a necessary and regular part of your business operations.
The exclusive part of the IRS requirements is a problem for many drivers. It just isn't that common for a rideshare driver or delivery contractor to set aside space exclusively for this type of work.
I would say that most app based independent contractors would have trouble convincing an auditor that their home office is their principle place of business. Deliveries for Doordash, Instacart, Uber Eats, Grubhub and others happen out on the road. Trips for Uber and Lyft don't take place at home. The overall nature of gig work rarely lends itself to home-based administrative work.
That doesn't mean no one can qualify:
The IRS has stated that a determination must be made “in light of all the facts and circumstances.”
In other words, everyone is different.
The fact that regular and exclusive use of a home office space is not the norm for gig workers doesn't mean it is never the case. It all depends on how your individual business operates.
I know of gig workers who have expanded their business beyond the gig apps. They have their own client lists, they schedule rides and/or deliveries, and do marketing. They may have a lot more time involved performing administrative and marketing tasks.
There are many who use their experience and insights on social media (or on a website like this one). They're able to make money from advertising or product recommendations. There's a very real part of their business now that requires them to work from home. Now all of a sudden, everything is different.
I personally don't claim the home office for my delivery business. However, I treat my website as a different business entity, and I do claim the home office for that business. My office is only used for writing and producing content, and the business is very regularly performed from that office.
The important point here is, don't decide whether to take the deduction based on what someone else tells you. Just because some stranger on Facebook says to claim it isn't a good reason. And just because I don't see it as the norm for what we do is not enough reason not to.
Decide based on the IRS requirements. Do you have space exclusively for your business (and no personal use)? Does your use meet the definitions above? The answer to those questions determines whether you should write off your office.
How does the home office deduction work if you do qualify?
I see a similarity between this and how the IRS treats the personal and business use of your car. You can either calculate a business percentage of your home related expenses, or you can use a flat rate method.
What you are trying to do here is figure out how much of the cost related to your home can be attributed to your business. You're paying for the space and you have to heat the place. That applies to your business.
As a result, the IRS lets you do things the easy way or a more complicated way. They have what they call the regular method, which calculates a business use percentage for your home, and they have the simplified option with a flat rate calculation.
It all starts with determining how much space your office takes up.
How many square feet cover your home office?
Both methods require you to determine how many square feet are used.
I've taken one of the bedrooms in my home. I only used it for my business. That's pretty easy to calculate. A ten foot by twelve foot office is 120 square feet.
Maybe you have a desk in a guest bedroom. That bedroom gets used, however the part of the room where your desk sits is used only for your business. That might be a four foot by five foot space (allowing reasonable room to get to the desk) or twenty square feet.
You need to determine what space is only for your business and is a regular part of your business. Do you perform administrative work there? Is it where you meet clients or customers as part of the normal course of business? Do you use space for storing inventory or items that you use or sell in the operation of your business?
It doesn't matter if you rent or own your home. In fact, it doesn't matter what kind of home it is. The IRS even allows you to claim the home office deduction for the business portion of a mobile home.
Determine what the spaces are. Only include spaces that are exclusively used for business. Determine how many square feet make up that space.
Using the simplified option (or flat rate method).
Originally, if you wanted to claim the home office deduction, you had to figure out all the costs related to your home. Then you had to figure out what percent of your home is used for business. It's a complicated process.
For the tax year starting January 1, 2013, the IRS introduced a simplified method to calculate the home office deduction. Using the simplified method, one can take a deduction of $5 per square foot for any home office that meets the qualifications, up to 300 square feet (or a maximum deduction of $1,500 using the simple option).
It's a lot like the standard mileage allowance, or taking a standard deduction instead of itemizing. The purpose was to simplify things and reduce a lot of the book keeping.
That 120 square foot office means you can claim $600 for home office expenses. If it's just a desk space taking up 20 square feet, you can still claim $100.
Using the regular method (or actual value method).
Since we compared the simplified method to the standard mileage allowance, we can compare the Regular Method to the Actual Cost method of claiming expenses on your car. It works a lot the same:
- You determine the business percentage of your home office
- Add up all the costs related to your home
- Multiply your business percentage against the total cost to determine the deductible cost.
To figure out the business percentage, you divide the square footage of your home office space by the overall square footage of your home. If you have a 1,000 square foot home and a 100 square foot office, the portion of your home used for business is 10%
Then you figure out the cost of your home. The IRS has you add up total direct and indirect costs including:
- Casualty losses
- Deductible mortgage interest
- Real estate and property taxes
- Repairs and maintenance
- Other home related expenses such as security, cleaning, HOA fees
Once you've figured out the total cost, multiply the business percentage times the overall cost of your home. Now you have your allowable home office deduction.
Which method is better?
This depends on a lot of factors.
Many prefer the simplified method even though they can claim more using the regular method. That's because the regular method can be pretty complex.
Calculations for depreciation, if you own your home, can be pretty complicated. There can be tax repercussions if you use the actual method and sell your home. Mortgage interest and property taxes are allowable tax deductions, which means you have to be careful not to claim those costs twice. All that can make it tricky.
Ultimately, the best answer to the “which is better?” question is: I can't tell you in an informational article like this. It's much better to rely on a tax professional who can advice you on your personal tax situation.
Where do you claim the Home Office Deduction on your taxes?
Just like other business expenses, you claim the Home Office Deduction as part of reporting your business income. The home office deduction is not an itemized deduction. Instead, it's one of the expenses that you claim on Schedule C, an addition to your 1040 tax form.
If you are using the simplified method, you'll list how many square feet are in your home and the square footage of your home office space in the lines next to line 30 of Schedule C. Then on line 30, you'll put your calculation (office square feet at $5 per sf).
If you are using the regular method, you'll have to fill out another form called form 8829. On that form, you list all the different costs related to your home. The total amount you can claim (line 36 on form 8829) will get moved to line 30 of your Schedule C.
The amount you claim will be treated like other expenses. Schedule C lists your income and your expenses. Expenses, mileage, and home office deduction are subtracted from your gig economy income. Your profit, or what's left over after expenses, is the basis for your self-employment tax. That profit is also added to other taxable income to determine your overall income tax.
Like all other business expenses, when you are self-employed you are able to take this write off whether or not you take the standard deduction. That's because the expenses are claimed on your Schedule C, not part of your itemized deductions.
What is the risk of claiming the home office deduction as a delivery or rideshare contractor?
When you fill out your schedule C, one thing you are doing is telling the IRS what kind of business you are running. That categorizes your business.
The risk you run comes with how the IRS computers are always looking at patterns. What kind of expenses are normal for what you do?
That can be a good thing and a bad thing.
For my website business, if I said I were driving 45,000 miles per year, that could raise a red flag. The IRS knows that kind of mileage isn't normal for a blogger. However, if your business is rideshare with Lyft and Uber, that kind of mileage is normal.
This is why I keep separate records for my website business than I do for delivery. It's the reason I file taxes for each one on its own. The things that are normal for each kind of business are very different.
The IRS has a very general rule when it comes to business expenses: The expense must be ordinary and necessary for the operation of your business.
This is where those computers and patterns come in. If a certain expense is not typically ordinary or necessary for your type of business, that's the kind of thing that can raise a flag. The computer can say hey, this doesn't look right, you guys might want to look into this.
I really don't know how high the risk of an audit is. When I asked around about the risk of an audit, one response that I received really put things into perspective.
many independent contractors don't have the financial security or free time to really survive an audit, which is why I advise cautionAnn Martin, Director of Operations of CreditDonkey
Should you write off your home office on your Schedule C for delivery or rideshare?
I won't tell you what to claim or what not to. That's something you need to talk to your tax professional about.
I personally wouldn't claim my home office as part of my own gig economy delivery business. That's because I cannot say honestly that the admin work I do at home is more than occasional. It doesn't meet the IRS test.
Having said that, if your business operates differently, things may be different for you. Is the space exclusive and only used for your business? Are you doing admin work more than just occasionally?
In the end, that's a decision you have to make based on how you run your business. I think the question would be, what would a reasonable person say? Sometimes I think we can spin an expense like crazy. We come up with a twist on how you could argue that this might be legit.
In the end though, I think you know whether it's legit or whether you're stretching things.
For most of us in the delivery and rideshare space, I don't believe it is a good idea to claim the deduction. However, there are exceptions. You know more than I would how your business operates.
I do think a lot of drivers might not think this is fair.
Other businesses can claim that deduction, so you'd think there would be more room for gig economy drivers, right?
But there's a flip side to that. For those of us in delivery and rideshare who drive a lot, we are using our car for the bulk of our business operations. Most of us get a really nice windfall out of that. For most of us, it costs a lot less than 56¢ per mile to operate our cars. In other words, we already get to write off far more than what our true expenses are.
Very few businesses get that extra benefit. If we really want fair, we should be careful what we ask for.
The fact that we use our car for business gives us a far bigger tax advantage than what the home office deduction gives.