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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:

  1. Sole proprietorship (easiest and most common)
  2. Partnership
  3. An LLC (also common)
  4. 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.

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