Quick answer: you can deduct part of your home’s costs for a side hustle if a specific area is used regularly and exclusively for the business and is your principal place of business, a place where you meet clients, or a separate structure used for the business. The simplified method lets you deduct $5 per square foot for up to 300 square feet, a maximum of $1,500 a year. The regular method uses Form 8829 to deduct the business share of actual costs such as rent, mortgage interest, utilities, insurance and depreciation. A corner of the dining table that the family also uses does not qualify.
Plenty of side hustles are run from a spare room, a converted closet or a corner of the basement. If that space meets the IRS rules, part of what you already spend on housing can reduce your taxable side hustle profit.
The rules are strict, though, and the home office deduction is one of the most misunderstood tax breaks. This guide covers who qualifies, how the two calculation methods compare and the mistakes that cause trouble. For the bigger picture on building a business alongside your job, see our side hustle ideas and startup guide.
Sources: IRS Publication 587, Business Use of Your Home; IRS Form 8829 and its instructions; IRS Simplified Option for Home Office Deduction page and Rev. Proc. 2013-13; Instructions for Schedule C (Form 1040); IRS Publication 523, Selling Your Home. Checked October 2026. General information, not tax advice; ask a tax professional about your situation.
Who Can Take the Home Office Deduction
The deduction is available to self-employed people, including sole proprietors and single-member LLC owners who report on Schedule C. Your side hustle must be a real business, not a hobby. Our guide on how the IRS tells a hobby from a business explains that distinction.
Employees cannot deduct a home office for their day job. Since 2018, unreimbursed employee expenses have not been deductible for most workers, and that rule is now permanent. So a home office used for both your W-2 remote job and your side hustle needs careful thought, because the exclusive use test applies to the whole space.
Owners and renters can both qualify. Homeowners deduct a share of mortgage interest, property taxes and depreciation, and renters deduct a share of rent.
The Two Main Tests
Regular and Exclusive Use
IRS Publication 587 says the space must be used regularly and exclusively for your business. Regular means ongoing use, not an occasional weekend. Exclusive means the area is used only for the business.
The area does not have to be a whole room. A clearly defined part of a room can qualify, such as a desk area marked off from the rest of a bedroom. What fails the test is a space that also serves personal purposes, like a guest room that hosts visitors twice a year or a kitchen table where the family eats dinner.
Principal Place of Business or Another Qualifying Use
The space must also be one of the following:
- Your principal place of business for that side hustle.
- A place where you meet clients or customers in the normal course of business.
- A separate structure, such as a detached studio or garage, used in connection with the business.
A home office can be your principal place of business even if you do some work elsewhere, as long as you use it for administrative or management tasks and there is no other fixed location where you do substantial administrative work. For a photographer who shoots on location but edits, invoices and schedules from home, the home office often qualifies.
Two Exceptions to Exclusive Use
Publication 587 allows two exceptions.
- Storage of inventory or product samples, if you sell products at retail or wholesale, your home is the only fixed location of the business and you use a specific area regularly for storage.
- Qualifying daycare facilities, where the space can be used for daycare and personal purposes under special rules.
A reseller who keeps inventory on shelves in a basement may qualify for that area even if the family also walks through it, as long as the storage area itself is defined and used regularly.
Method 1: The Simplified Option
The IRS introduced the simplified method in Rev. Proc. 2013-13 to make the deduction easier.
How It Works
You multiply the square footage of your qualifying office by $5. The maximum area is 300 square feet, so the largest deduction is $1,500 per year.
For example, an 8 by 10 foot room is 80 square feet. At $5 per square foot, the deduction is $400.
What You Give Up
- No depreciation deduction for the business part of your home.
- No carryover. If the deduction is more than your side hustle’s gross income minus other business expenses, the extra is lost.
- The rate has not changed since the method was introduced, so it may be smaller than your actual costs.
What You Keep
Homeowners who itemize can still deduct mortgage interest and property taxes on Schedule A in full, because none of it is assigned to the office under this method. You also avoid depreciation recapture when you sell the home.
Method 2: The Regular Method
The regular method uses Form 8829, Expenses for Business Use of Your Home. It takes more work but can produce a bigger deduction.
Figure the Business Percentage
Divide the office’s square footage by the total square footage of your home. A 150 square foot office in a 1,500 square foot home is 10 percent.
Sort Expenses Into Direct and Indirect
Direct expenses are only for the office, like painting the office or repairing its window. These are generally deductible in full.
Indirect expenses benefit the whole home, including:
- Rent.
- Mortgage interest and real estate taxes.
- Homeowners or renters insurance.
- Utilities such as electricity, heat and water.
- General repairs and maintenance.
- Security system costs.
You deduct the business percentage of indirect expenses. With a 10 percent office, $18,000 of annual rent produces a $1,800 deduction for rent alone.
Depreciation for Homeowners
Owners also depreciate the business part of the home itself, not the land, generally over 39 years as nonresidential real property. Depreciation lowers taxes now but has consequences later, covered below.
The Income Limit and Carryover
Your home office deduction under the regular method cannot exceed the gross income from the business use of your home minus other business expenses. Unlike the simplified method, though, any disallowed amount can be carried forward to future years. That matters for new side hustles that have low income in the first year.
Choosing Between the Methods
You can choose either method each year. A quick comparison often makes the choice clear.
| Factor | Simplified | Regular |
|---|---|---|
| Calculation | $5 per square foot, up to 300 sq ft | Business percentage of actual costs |
| Maximum | $1,500 | No set dollar cap, limited by business income |
| Form | Worksheet in Schedule C instructions | Form 8829 |
| Depreciation | None | Yes, for owners |
| Carryover of excess | No | Yes |
| Record keeping | Square footage and use | All home expense records |
The simplified method suits small spaces, renters with modest rent and anyone who values a fast return. The regular method can pay off in high-cost housing markets, larger offices and homes with big utility bills.
A Worked Example
Consider a renter who runs a bookkeeping side hustle from a 120 square foot spare room in a 1,200 square foot apartment. The room is used only for the business, and clients never visit. The business share is 10 percent.
Her yearly housing costs look like this:
- Rent: $21,600
- Electricity and gas: $1,800
- Renters insurance: $240
- Internet: $900, of which she already deducts the business share as a separate expense
Under the regular method, 10 percent of rent, utilities and insurance is $2,364. Under the simplified method, 120 square feet times $5 is $600. If her side hustle earns enough profit to absorb it, the regular method gives a deduction nearly four times larger.
Now picture a homeowner with a 100 square foot office in a 2,500 square foot house, a low mortgage and modest utility bills. The business share is only 4 percent, and the regular method might produce a deduction close to the simplified $500 while adding depreciation recapture later. For that household, the simplified method is often the easier and cleaner choice.
Running both numbers each year takes a few minutes and avoids guessing.
Home Office and Other Deductions
The home office is one of several deductions that can shrink your taxable side hustle profit. Mileage from your home office to clients, supplies, software and a share of your phone bill may also qualify. Our list of common side hustle tax deductions covers the records the IRS expects for each one.
Where It Goes on Your Return
You report the home office deduction on line 30 of Schedule C. Under the simplified method, you enter the square footage and the deduction there. Under the regular method, you attach Form 8829 and carry its total to line 30. Our Schedule C walkthrough shows how line 30 fits with the rest of the form.
Because the deduction lowers net profit, it reduces both income tax and self-employment tax.
What Happens When You Sell Your Home
If you used the regular method and claimed depreciation, part of your gain when you sell may be taxable even if the rest qualifies for the home sale exclusion. IRS Publication 523 explains that the exclusion does not cover depreciation claimed after May 6, 1997. That amount is generally taxed when you sell.
The simplified method avoids this issue because it does not include depreciation. For homeowners who expect to sell in a few years, that can be a reason to choose it.
If the office was a separate structure, such as a detached studio, the rules for allocating gain are different. A tax professional can help.
Records to Keep
- A floor plan or simple sketch with measurements of the office and the whole home.
- Photos showing the space set up for business use.
- Rent or mortgage statements, property tax bills, insurance bills and utility bills.
- Receipts for repairs and improvements.
- Notes on how and when you use the space.
Keep these with the rest of your business records. Running all business income and costs through a separate side hustle bank account makes the paper trail cleaner, though home costs paid from a personal account still count.
Common Mistakes
Claiming a Shared Space
A desk in the living room that the kids also use for homework does not meet the exclusive use test.
Mixing Day Job and Side Hustle Use
If the office is used for your employer’s work, it is not used exclusively for your side hustle.
Deducting More Than the Business Earns
The deduction cannot create or increase a business loss. With the simplified method, the excess disappears.
Forgetting Utilities and Insurance
Under the regular method, many people deduct rent but miss the business share of electricity, internet and renters insurance.
Ignoring Depreciation
Owners using the regular method are required to account for depreciation. The IRS treats depreciation you could have claimed as reducing your basis even if you did not claim it.
Frequently Asked Questions
Can I claim a home office deduction for a side hustle if I also work remotely for my employer?
Only if the space is used exclusively for the side hustle. If you also use it for your employer’s work, it fails the exclusive use test.
How much is the simplified home office deduction?
It is $5 per square foot for up to 300 square feet, so the maximum is $1,500 a year.
Can renters take the home office deduction?
Yes. Renters who qualify can deduct the business percentage of rent and other housing costs under the regular method, or use the simplified method.
Does the home office have to be a separate room?
No. A clearly defined area used regularly and only for the business can qualify, even if it is part of a larger room.
Can I switch between the simplified and regular methods?
Yes. You can choose either method each tax year.