Work at Home Taxes
When you work at home, you will be able to
claim many tax deductions from the IRS. Most people work at
home as sole proprietors which means that they have not
incorporated their businesses. There are different business
legal structures. All of them will give you tax deductions but
how you deduct them and what tax forms you need to use depends
on the legal structure of your business.
Business Legal Structures
You can operate your business as a:
Sole proprietorship (easiest and most common)
An LLC (also common)
Corporation (S Corporation or C Corporation)
The most common legal structures
When you earn money by working at home, you
can either treat it as a personal income or a business income.
If you treat it as a business income and you have not filed any
paperwork for your business with the IRS or a state, then you
are effectively operating your business as a sole proprietor by
default. That means, when filing your tax return (1040 forms),
you are going to have to file a Schedule C as well to claim
your business expenses as tax deductions. This is the simplest
way to operate a business. However, your business and yourself
are considered the same entity and you are liable for anything
the business incur.
Some people prefer to have the business be a
separate entity so they set up either a corporation or an LLC
which stands for Limited Liability Company. However, to set up
an LLC, you need to file many forms with the IRS as well as the
state where the LLC is registered. This is a more complicated
way to run a business but it is safe because your business is
considered a separate entity to yourself.
What business to start?
For tax purposes, you need to start a
business that you think will eventually profit. While the IRS
allow many tax deductions of business expenses, it needs to
know that they are business expenses, not hobby expenses which
are not tax deductible. If after many years, you have never
profited from your business, the IRS might consider it a hobby
and disallow your previous deductions. The IRS has business
codes for each type of business, see IRS Business Codes.