Running a Business From Home: What You Need to Know
Running a business from home is easier than ever before. If you're a business owner who's had to transition to working remotely because of COVID-19, you might have experienced some of the benefits of this setup. Despite the unpleasant circumstances, you may even find yourself thinking about making this arrangement permanent.
Operating a home-based business has pros and cons. Here's what you need to know to keep your business and your life running smoothly when home is headquarters for both.
Using your home address
The basic steps for establishing a new business in the US are similar whether your main office is in your home or elsewhere. However, in addition to market research, choosing a business name and business planning, home-based business owners must pay special attention to the requirements for a home-based business in their state.
Your location could impact your business registration, required licenses and permits, and what taxes and forms you need to complete. For privacy reasons, you might prefer to use a virtual address at a nearby mail center instead of your home to receive mail and packages.
If you live in a residential area, find out about the by-laws, regional taxes, licensing and permit requirements, and zoning restrictions on running a business from your home. These could vary depending on the type of business you have and the impact it has on the neighborhood.
For example, do you own a business that requires employees to come and go at all hours and park on your residential street? If so, you might face a challenge getting a license or permit to run the business from home. However, a small business with just one or two employees keeping regular hours might find it easier to get a permit, even in an area zoned for residential use.
Key tax breaks and deductions
If you run your business from home, you could enjoy some valuable tax breaks, including the home office deduction for IRS-approved home office areas. You might also qualify for a tax break on a portion of your home-related expenses, including:
- Homeowners insurance
- Homeowners association fees
- Cleaning services or supplies for the rooms of your home used in your business
- A portion of your mortgage insurance and interest
- A portion of your utility bills, including electricity, internet, heat and phone
- A portion of your home repairs and maintenance
The IRS has very strict requirements surrounding home office areas. Review them carefully before starting or relocating your business to your home.
It's also important to recognize the taxes that could impact your home-based business. You could be responsible for income tax, self-employment tax, employment tax and excise tax.
Claiming business-related expenses
Home-based businesses might also qualify for tax breaks on some business-related expenses, even if your business does not qualify for the home office deduction. Business-related expenses for businesses run from a home include:
- Cost of goods sold
- Capital expenses
- Business use of your vehicle
- Payment to your employees
- Retirement plans
- Business taxes and insurance
- Some meals, entertainment and travel expenses
- Office supplies including postage
- Professional expenses and fees for your accountant, legal counsel or contract labor
- Marketing and business development costs
Making life easier as a business owner
Today's technology makes running a business from home easier than ever before. Keep in contact with your employees or service-based clients through video conferencing such as Zoom, WebEx or GoTo Meeting. Connect with your remote team members using project management technology such as Airtable, Trello or Asana.
As a business owner, you may find you spend long hours juggling many responsibilities. However, when you run a home-based business, it can become all too easy to let your work tasks bleed into your family time and personal space.
To keep a healthy work-life balance, establish set work hours and make a few rules for yourself to follow. For example, silence your phone during family meals or during one-on-one time with your spouse or kids. Don't bring your work laptop out of your office. And consider getting two cell phones, one for business calls and one for personal use.
Running a business from home successfully takes some effort. You'll need to think a little more carefully about taxes and legal requirements and the logistics of remote work. But with the right plan in place, you can make this flexible arrangement work for you.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.