A home-based business is any business where the primary office is located in the owner's home. You don't have to own the property, but you do need to be running a business out of the same premises you live in for the business to be considered a home business.
While we think of home-based business owners as working at home, that's not necessarily the case. Software trainers, truckers, and interior decorators are just three examples of people who may run home-based businesses but have to travel to provide their services.
Many online businesses are ideally suited to be home-based businesses, but it's also increasingly common to see professionals from travel agents to notaries public operating home-based businesses.
The Advantages of Home Businesses
There are a number of aspects to running a home business that draw people to it, particularly when it comes to saving money on expenses and taxes.
The most obvious home business advantage is the lack of any commute, which saves a tremendous amount of time and eliminates the need to spend money on bus fare or car expenses. For many home-based business owners, their commute consists of just walking down a flight of stairs, unless you have to do a lot of traveling anyway to visit customers.
All home businesses share the advantage of not having the expense of buying or renting business premises elsewhere, which cuts down on overhead considerably. Because there is no separate office to rent or maintain, they may also save money on expenses such as utilities, and—depending upon local regulations—the cost of business licenses and taxes.
Income Tax Advantages
Running a home-based business can be a great way to recoup your business expenses and in some cases, reduce the amount of income tax you have to pay.
In order to qualify for a reduction in income taxes, your office space area needs to pass the "exclusive use" test, which means you must be able to show that a portion of your home is your principal place of business and is used regularly and exclusively for conducting business. If you just work off your kitchen table and you also use that area for family dinners and other activities, the IRS won't let you take a deduction on it.
If you have children, operating a home business can give you more flexibility with child care and more time to spend with your family.
Once they're old enough, you might even employ your children in your business. It's perfectly legal as long as you follow the rules. Payments for the services of a child under the age of 18 who works for his or her parent are not subject to federal social security and Medicare taxes, as long as you run sole proprietorship or partnership. The child is also not subject to the Federal Unemployment Tax Act (FUTA) until the age of 21. However, payments to the child are subject to income tax withholding no matter the age.
Always consult with an attorney before taking steps to employ your children in your business so that you can ensure you comply with all federal, state, and local regulations, which may vary greatly depending on locality.
The Disadvantages of Home Businesses
A home-based business is not for everyone, however, and there are some disadvantages:
It's Not Allowed in Some Areas
Most municipalities regulate home-based businesses, and particular neighborhoods may have covenants against them. Landlords tend not to be home-based business-friendly if you're renting.
It Might Not Work for You
Even if running a home-based business is allowable where you live, you may not want to. Issues such as signage, parking, and the need for home-based insurance may make running a home-based business a bad idea. If your clients need to visit you, this can create conflict with your landlord or other tenants (if you live in an apartment building) who may be irritated at the non-resident traffic.
Many people who run home-based businesses suffer from feelings of isolation and being out of the loop. This feeling can be particularly acute for people who have spent much of their career in highly collaborative office areas and who suddenly have no one to talk to when they switch to an entirely home-based career.
Interferes With Family Life
Others find that running a home-based business means that their business causes a conflict with family life. They may find that running a business out of the home means that family time is constantly being usurped by business needs, and this blurring of the lines between home and business means that they never feel off the clock even after hours.