Working from home can give you freedom in regards to your schedule. However, it can also bring many concerns around tax time.
You will likely find yourself asking questions regarding tax deductions for your home office with items such as printer ink, binder clips and more. Whether you work for someone and telecommute or are self-employed, there are considerations that should be incorporated when it is time for tax deductions.
In general, self-employed individuals and remote workers are subject to many of the same deductions and record-keeping requirements. However, there are certain significant differences. Unfortunately, the tax system is not as straightforward for those who work from home as it is for traditional in-office employees. That is because in-office workers are on payroll and thus have federal, state, Social Security and Medicare taxes deducted from their paychecks. Furthermore, they do not have to worry about taxes throughout the year, until it is time to file for a tax return.
Conversely, the process for self-employed workers to file for taxes is slightly more complicated. For example, it is important for them to keep up with all of the paperwork regarding their expenses to avoid miscalculations. Moreover, they should expect to pay the entire self-employment tax, which is 15.30 percent of their income. To learn more about what to deduct when working from home and ways to prepare for tax season, refer to the sections below.
If you have a home office, you should know whether or not you can deduct office expenses from your taxes. In general, with a home office deduction, you can write off expenses for things that were bought for the purpose of work. These deductions can include rent, mortgage, paint, real estate taxes, utilities or home insurance. Furthermore, when you are figuring out what you want to deduct, you can use a percentage of your home for work. On the other hand, you may use a more simplified deduction of $5 per square foot of the office area.
Whether you are working remotely for an employer or are self-employed, your office space must be used regularly and exclusively for work. Additionally, for expenses to be deducted, your office space must fall into one of these categories established by the IRS:
It is worth noting that your workspace does not have to always be in a separate room. However, it should be “separately identifiable,” meaning that it is an area used exclusively for work. In addition, it is a good idea to take pictures of your work area so that you can provide proof in the event of an audit.
In general, you cannot use your home office for anything other than work. The only exception is for holding inventory for your business.
Similar to the home office deductions, business-related expenses can also be complicated for professionals who work from home. Software, books and technological devices are examples of items that may be necessary for your home office’s efficiency.
If you work from home as an employee for a company, you must look into “ordinary and necessary expenses” or “employee business expenses” found on Form 2106. However, for these costs to qualify as tax deductions, they must be expenses that your boss will not reimburse you for. For instance, certification fees, subscriptions to journals and binder clips may be eligible expenses. Moreover, you could deduct long-distance phone calls that have appeared on your phone bill, as well as other phone bill items, if you have a second line that is used exclusively for your work.
You must itemize your payments if you want to deduct the expenses that have not been reimbursed by your employer. Additionally, depending on the circumstances, your standard deduction may be higher. However, you should know that there is a limit to what you can deduct, and your expenses will fall under miscellaneous deductions. Generally, you will only be able to deduct items that are above two percent of your adjusted gross income. Therefore, if you make $50,000 a year and have $1,500 in deductions, you can only deduct up to $500.
When it comes to working for employers, the best option is to have your boss reimburse you for your work-related purchases, instead of relying on this specific tax break.
If you work in a different state than your employer, you must also learn about the telecommuting tax penalty. That is because this penalty could result in you being taxed by both your state and your employer’s state, which is commonly referred to as a double taxation.
Certain states have regulations that require all residents and nonresidents to pay a state income tax on every cent earned while working for a company in that state. Moreover, other states may require you to pay the state income tax for every cent you make while working in the state as well as for the work you are doing for a company that is out-of-state. Thus, these penalties often cause confusion among workers.
Consider the following example: you are a resident in Connecticut and have a job with a company based in New York. You decide to work from home a few days out of the week because of the long commute to New York. In this case, the money you are earning on the days you work from home is subject to the income taxes in both Connecticut and New York.
You will find that some states give credit for the taxes of nonresidents, while others do not. In any case, you still need to file for an income tax return for the other state. Depending on the way that taxes are calculated in your state, your tax liability cost may be higher.
This penalty specifically hurts telecommuters and their employers. That is because the company may have to pay for state taxes for one employee working from home in another state. In 2009, the Telecommuter Tax Fairness Act, also known as HR 260, was introduced to get rid of the penalty. However, this act is still pending approval in Congress.