The Full Guide To The Work From Home Tax Deductions
Since the covid-19 outbreak, the number of employees moving from office life to remote working has dramatically increased. With this rise of remote working, many wonder exactly what their work from home tax deductions is, or if these deductions are even possible? Whether you’re an employee temporarily working from home, self-employed and working in your home office, or an employer in charge of where your employees and contractors work, you’ll want to know your working from home tax deductions.
Unfortunately, tax deductions and your rights to them will vary depending on your circumstances. If you’re an employee, you’re unlikely to get any work from home tax deductions regardless of covid, whereas self-employed individuals will be eligible. If you’ve made the switch from the big office to remote working and want to know where you stand with your covid home office tax deductions, or you’re an employer looking for tax advice - keep reading!
Remote Working Tax Deductions For Employees
Covid-19 has definitely changed the way most US employees work. Most employers have shut down their offices and asked their workers to start working remotely instead - which has contributed to the rise of home offices and individuals working from home. If you were remotely working last year, you should have filed your 2020 taxes by May 2021.
Fortunately, for those that have missed that date, you can still send in your e-File 2020 taxes without a penalty as long as they’re in by October 15, 2021. Working from home tax deductions 2020 will be the same as the work from home tax deductions 2021, so if you need to file for 2020, 2021, or both, this information will apply for both tax years.
Can I Receive Tax Deductions From Temporarily Working From Home?
In short, the answer is no. Due to the Tax Cuts and Jobs Act of 2017 put in place by Trump, home office expenses are no longer deductible for employees. This commenced as of 2018, so home office tax deduction 2020 and onwards won’t be eligible, even with covid-19. Before this Act, employees could claim deductions for unreimbursed employee business expenses, such as home office furnishings like desks, chairs, and printers.
Employees could also claim deductions for portions of their bills like electricity and internet. However, now, if you receive a W-2 tax form from an employer, you will be ineligible for home office tax deduction 2020, 2021, and any other tax year up until 2025. For example, if you have to work from home due to the current pandemic, and you buy a desk, chair, and computer that you need to work remotely, you will not be able to claim tax deductions on these items. The same goes for any increased utility bills, too.
It may be disappointing to know that you won’t receive any covid home office tax deductions, but it doesn’t mean that your money has been wasted. If you have gone out and made purchases so you can work from home, your employer should be able to reimburse you.
What Happens If My Employer Reimburses My Work From Home Expenses?
If your employer is happy to reimburse you for your remote working expenses, you’ll have to turn in your receipts. You’ll be happy to know that reimbursements are NOT taxable. Since this money won’t be included in your W-2 form, you won’t get a deduction. However, if your employer chooses to reimburse you in the form of a monthly stipend, this will be taxable as it will be on your W-2.
What If I’m Temporarily Working From Home In Another State?
Before Covid-19, some workers would commute from other states to their work offices - this was common practice for many people who live in neighboring states and commute to cities like New York, Philadelphia, and Boston. If your employer is based in a neighboring state to your home and you’re now working remotely, you might be wondering what this means for your taxes.
In general, you shouldn’t have to pay extra taxes. Workers can claim credits for the taxes they pay to another state. Some states also have reciprocal agreements with neighboring states to allow residents of one state to request exemption from withholding from the other state. However, there are a few states that don’t allow these reciprocal agreements and instead have convenience tax laws.
In these states, you will have to pay state taxes based on your location of employment, so you could end up paying double tax. These convenience tax laws are in effect in states such as Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania. You can find out more about taxes when living and working in different states in our ‘Living In One State Working In Another’ income tax blog.
Remote Working Tax Deductions For The Self Employed
If you’re self-employed and currently working from home, whether that’s due to covid-19 or not, you will receive work from home tax deductions on both equipment and bills. This includes workers such as freelancers, contractors, and consultants, too. As a self-employed individual, you can deduct home office expenses such as furnishing, equipment, and general office supplies you buy for your home office.
You can deduct a portion of your house bills as home office expenses, too, however, you’ll have to be fair. To deduct house bills as home office tax deductions, you’ll have to work out how much space your home office takes up of your house as a percentage. You then get your bills such as electricity or internet and deduct the percentage from them to get your eligible tax deductions.
There are, however, some extra requirements you must meet to be eligible for tax deductions on your home workspace to bear in mind.
Self-Employed Tax Deduction Requirements
One requirement for self-employed workers looking to claim work from home tax deductions is that your home office must be dedicated for your work only. This means that you can’t work from your kitchen and claim tax deductions. Your home office must also be your principal place of work. For this, you’ll have to prove that most of your income-earning activities occur there, or that you conduct administrative or management functions at this location such as sending out invoices and keeping the books.
Your home office should also be used exclusively and regularly as a place to meet with customers and clients if you want to claim for work from home tax deductions. If you’re using a separate structure for your home office, such as a detached garage or a converted barn, the requirements are more lenient. To be eligible for tax deductions, you’ll only need to prove you use the space regularly and exclusively for any business purpose.
Remote Working Tax Deductions For Employers
As an employer, if you’re asking your employees to work remotely, you should think about helping your workers out with their expenses. Since employees can no longer claim working from home tax deductions 2020 onwards, you should try to ease their expenses.
Ways To Ease Remote Working Expenses For Employees
Look Into Disaster Relief
There is an option to reimburse any employee expenses by qualifying them as disaster relief payments. There’s a provision under Section 139 of the US Internal Revenue Code that allows employers to give their workers tax-free payments to cover any reasonable and necessary expenses incurred from a federally declared disaster.
Covid-19 was declared a disaster, so employers can choose to reimburse the costs workers have paid to set up their home offices via disaster relief. These payments are tax-free, so this will make it possible for your employees to get home office tax deductions for 2020 onwards. Before you claim disaster relief, you need to make sure that your employees’ expenses fit within one of the following categories:
Work-from-home expenses such as office supplies, furniture, and internet
Unreimbursed medical expenses
Additional transportation expenses
Dependent-care expenses such as remote learning expenses for children or childcare
Purchase Employee Equipment
Instead of expecting your employees to buy and pay for remote working equipment, consider buying these items for them. As an employer, you will then be able to claim these as business expenses, so it’s as if you were getting work from home tax deductions. Find out what your employees need to carry out their work from home, buy the necessary equipment, deduct the cost from your taxes, and then send the equipment over to your worker’s home.
Reimburse Your Employees Yourself
If you don’t want to use the disaster relief or your employees have already purchased home office equipment, you can choose to reimburse them for these expenses yourself. You can decide to reimburse the full amount or partial amounts of your workers’ expenses. To make sure you can claim back taxes on these reimbursement payments, your employee needs to make sure their home office space meets the IRS requirements for a home office.
If the space meets these requirements, you can claim reimbursements for equipment and bills. If your employee wants reimbursement for increased bills such as internet or electricity bills, they need to work out how much of their office takes up their home in a percentage - for example, using one small room in a 3 bedroom house might only take up 10% of the property.
Once the percentage of the home being used for the office has been worked out, you can then take the cost of the bill in question and pay the percentage for it. So if your employees' office takes up 10% of the house, you could reimburse them 10% of their internet bill.
Pay Your Employees Through Monthly Stipends
Instead of reimbursing your employees for exact amounts, you can give them monthly stipends, otherwise known as an allowance. You can do this through a nonaccountable plan. If you choose this option, you’ll be giving your employees a specific dollar allowance each month to pay for their home office expenses without needing them to substantiate their expenses to you.
Monthly stipends are included in employee W-2 wages and paystubs as part of their income, so this makes the amount tax-deductible for the employer, but also makes the amount taxable for the employee. If you need paystub created, be sure to check out the paystub maker.
Consider Cross-State Costs
It’s not just remote working costs you need to consider, but you’ll also have to consider the tax issues your employees might face if they live in a different state from their work. If you’re requiring your employees to work from home, whether it’s temporarily or permanently, there are some states that will make you cover any employee expenses for this move.
States such as California, Illinois, Iowa, Massachusetts, Montana, New Hampshire, New York, Pennsylvania, and the District of Columbia are some of the states that have laws in which employers are required to cover expenses for their employees to work from home. Having an employee live in a different state from your company can also cause other tax issues, such as additional income tax filing requirements and double state tax.
While some states have announced that they won’t consider employees working from home due to covid-19 as physically working in that state, other states haven’t issued as much or any guidance on the matter - so you’ll need to check this.
As you can see, it’s not so straightforward when it comes to working from home tax deductions. If you’re self-employed or an employer, you have a few more tax deduction options than those employees that are working remotely for the time being. For those who are forced to work remotely by their employers due to covid - make sure you inquire about those expenses before you start making any purchases so you don’t lose any of your hard-earned money!
Whether you’re an employer looking for home office tax deduction advice for your employees, a temporarily remote-working employee, or a self-employed individual looking to invest in a home office, you should now have some knowledge on the potential tax issues you may face.