Wednesday, June 4, 2014

Tax advantages of working at home even if you still work a job

How much can the Average person save on taxes just by working at home?
And even if you still work a job outside the home??

Many would be that average people hesitate to start working at home because they think it is too risky from a money point of view. In fact, most people don’t think that getting started working at home is even worth trying unless they have all the time in the world to put into it. Of course making money is an extremely important factor as to the reason why you would want to work at home as well as having more time with your children and creating more quality time, but what if I were to tell you that you could save a decent amount of money every year working at home while only making a small profit or none at all?

That’s right! Most people don’t consider the Tax Savings you get when working at home. Most people don’t realize that having a day job is one of the worst ways to save on taxes because Uncle Sam takes a huge chunk out of your paycheck BEFORE you pay for anything. On the other hand when working at home you can effectively pay for everything using pre-tax dollars which can save you up to 35%. So while on paper your business may not be making any money, in reality you could be saving big bucks by purchasing goods with money that is not taxed at all.

But talk is cheap! I thought that it would be interesting to throw some numbers into the mix by calculating how much the average American could save by getting started working at home even if you have a job outside the home.

The Average American

First off, the average American makes roughly $63,091 before taxes. If we assume that they fall under the 25% tax bracket, the average American is also getting reamed up the wazoo by Uncle Sam to the tune of about $11960 before they can even use this money leaving themselves with only $51131. Even worse, the average American spends roughly $49638 a year which doesn’t leave much savings. It’s no wonder that the average American household is just barely scraping by!

Transportation – Gasoline And Oil Costs

The average American spends roughly $2384 on gasoline and oil related products. If we assume that gas is $3 a gallon and that the average car gets 20 miles per gallon, the average American drives roughly 15893 miles per year. We’ll round this number to 16000 for simplicity.

Currently, because I work at home, I’m able to expense roughly 22% of the miles I drive on my car for business purposes. How do I do this? Whenever I need to drive some place or run some errands, I make sure that I try to take care of something business related along the way. For example, if I need to go to the store, I also make a trip to the office store or other related establishment where I need to pick up something for my printer or anything I might need for my work at home situation. It takes a bit of planning and excellent documentation but you’d be surprised by how easily you can find ways to use your car for business.

For the average American, 22% of 16000 miles is roughly 3520 miles. For 2009, the IRS mileage tax deduction is 55 cents. 3520 * $.55 equals a tax writeoff of $1936.

Housing And Shelter

The average American spends $10,023 on housing or shelter every year. Currently,  I expense 20% of my mortgage interest for business related purposes. In actuality, I use more than 20% of dedicated  space in my home but we keep things at 20% to prevent the likelihood of an audit. In any case, 20% of $10023 equals $2004.60 of tax writeoffs for the average American.

Food – Eating Out

The average American spends roughly $2668 a year eating out. I love to dine out and love discussing business over dinner. In fact, I make many of my key business decisions at restaurants because it’s a more relaxed environment and easier for  to concentrate.

As a result, we are able to expense some of our meals every month. For this analysis, let’s assume that the average American can expense 10% of their meals. Because meals and entertainment can only be deducted at 50%, this effectively equals a 5% writeoff. $2668 * .05 equals $133.40.


The average American spends roughly $1600 on summer vacations every year. While travel expenses purely for pleasure can not be expensed, any vacation can be made to be business related with the proper planning. So what I do,  I usually do every year is plan our vacations around my business travel.

For example, a few years ago, I needed to go get additional training for my job outside the home which was not paid for by the job and was an out of pocket expense that was I was not able to write of because it was a W-2 job, but because I worked at home and used materials for that work at home situation I have over and above the job I had, I was able to write off much of it and also  I made a vacation out of it. I purposely planned my meetings every other day and used my free days to relax and pamper as well! If you do things right, you can pretty much expense almost the entire vacation!

Because I’m not sure how the $1600 a year is broken down in terms of airfare vs food/entertainment costs, I’m going to assume that 75% of this cost is deductible for the average American. Total tax deduction $1200.


Since I use 20% of our house for working at home, it’s only fair that I deduct the same percentage for utilities. In addition to water, gas and electricity, I also have a dedicated phone line for the work at home opportunity which can all be expensed.

The average American spends $3477 on utilities every year. Once again, the exact breakdown of this number is unclear so we need to make some assumptions. For example, a business probably wouldn’t be able to expense the cable tv bill. However, most other items are fair game. To be conservative, I’m going to assume that at least 10% of this amount is deductible which puts the deduction at $347.70.

Computer Equipment And Household Furnishings

Unfortunately, this category is extremely vague. Computer equipment and household furnishings covers everything from furniture all the way to decorative items and computers but excludes major appliances. Because this category is so broad, I’m going to be conservative here and assume only 15% of this amount is deductible.

Thanks to section 179, computer equipment and other furnishings can be expensed 100% up to a six figure dollar amount every year. Chances are, if you work at home and purchase a computer, it can be written off in its entirety in the same tax year. The average American spends $1797 in this category. 15% of $1797 is $269.55.

Adding It All Up

Obviously, I have not included every possible business expense in my analysis, only the common items. If you really want to get nit picky, in reality you could probably expense far more than what I’ve mentioned in this article.

In any case, if we total all of the categories mentioned above, this comes out to $1936 + $2004.60 + $133.40 + $1200 + $347.70 + $269.55 = $5891.25.

Based on an income of $63091, this represents almost a 10% writeoff on the average American’s taxes! Putting all of the numbers together at a 25% tax bracket, this is a savings of $1472.81 every year. Keep in mind that most of the deductions I calculated above were on the conservative side. In practice,  I actually deduct a good amount more especially under the computer and equipment category.

Further Reading

If you are worried about getting audited, the best thing to do is to arm yourself with an accountant and document every expense carefully. Your accountant should be able to tell you with high confidence whether or not an expense is actually deductible. This is free money folks, but only available if you work at home. Stop giving your money away to the government now!

Disclaimer: As one reader pointed out, this article is not meant to encourage people to haphazardly make tax deductions for their business. However that being said, the deductions mentioned in this article are not exaggerated. In fact, I believe that the majority of people don’t take tax deductions that are rightfully theirs because they are afraid of the IRS. Talk to your accountant! They will know how to help you figure out how to make the most out of your deductions.

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