Businesses have embraced the transition to a virtual workspace. As a result, several employees work remotely, and the way employers compensate telecommuters has also changed.
Employers discovered that remote work or telework is possible. And employees do not need to be present at the office all the time. As a result, telecommuting has become a popular way of working.
While more and more employers embrace this change, employers must be well-versed with the telework tax deductions.
Tax deductions for teleworkers are different from regular employees, and in this article, we’ll share everything about teleworking tax deductions. !
What are the Changes to Work-From-Home Tax Deductions?
Work-from-home has changed the existing tax deductions in the US.
Here are some changes in telecommuting tax deductions due to the Tax Cuts and Jobs Act of 2017 that you must be aware of.
- With effect from the 2018 taxation year, the Tax Cuts and Jobs Act of 2017 prevented employees from taking tax deductions for telework. They are not considered eligible for the telework tax deductions, even if they have significant unreimbursed expenses. However, this law has its own set of exceptions. For instance, eligible educators can claim telework tax deductions for up to $250 in expenses that employers won’t reimburse.
- As mentioned earlier, before 2018, employees could claim miscellaneous itemized deductions on Schedule A. But with the effect of the Tax Cuts and Jobs Act W2, employees are not allowed to claim any type of work-related deductions.
Tax deductions are no longer available for employees working in your company if you do not pay their expenses. The tax deductions include home office deductions as well.
Other unreimbursed expenses that telecommuting employees cannot deduct as telework tax deductions include;
- Tools and supplies
- Educator expenses
- Dues to professional societies
- Professional licensing fees
- Costs for meals and business travels
How do Telecommuting Tax Deductions Work?
For full-time work-from-home employees, certain job-related tax deductions may be available but only for the tax years before 2018.
Tax deductions for telecommuters work allow independent contractors with self-employment income to offset certain business income. These incomes must be relevant to expenses that are ‘necessary and ordinary’ for work.
Here are a few definitions of ordinary and necessary expenses for a better understanding.
According to the Internal Revenue Service (IRS),
- A common expense is accepted in the industry and is considered ordinary.
- A helpful and appropriate expense for your business is a necessary expense. But the expense need not be indispensable to be considered necessary.
Let’s look at an example here. Suppose a freelancer earns $60000 based on their client bills in a given year. They have expenses of $20000 that included home workspace supplies, advertising, and vehicle use for business purposes. In this case, the freelancer would be taxed on $40000 (keeping aside other deductions, credits, or types of income).
If you consider that the freelancer pays taxes at a rate of 10%, instead of paying 10% of $60000, the freelancer will pay 10% of $40000, which is equivalent to $4000. So, in this scenario, the telework tax deductions of work from home expenses reduce the total tax bill by $2000 (instead of paying $6000, the freelancer pays $4000).
Note: Telecommuting expenses are different from tax credits. If an individual has $20000 in telecommuting expenses, that does not mean they will have $20000 less in the total taxes. Instead, the amount taxed on reduced by the corresponding amount of claimed tax deductions.
Note: Telecommuting expenses are different from tax credits. If an individual has $20000 in telecommuting expenses, that does not mean they will have $20000 less in the total taxes. Instead, the amount taxed is reduced by the corresponding amount of claimed tax deductions.
What is the Eligibility for Teleworking Tax Deductions?
Is your employee eligible for telework tax deductions? Knowing the eligibility criteria is a must.
However, the Tax Cuts and Jobs Act, 2017 is set to run through 2025. Hence, all the taxation rules that existed before the Tax Cuts and Jobs Acts of 2017 will be back in play. Also, a few states like California, Minnesota, Virginia, and others did not conform to the Tax Cuts and Jobs Act 2017. They still allow miscellaneous itemized deductions, including employee expenses that employers do not reimburse.
Now that we have passed on the vital details, here’s the list of people who can take a tax deduction for telework for their business.
Independent contractors, part-time hires, and project-based employees like food delivery executives qualify as having their own business. So, they can file Schedule C and take tax deductions for relevant expenses that apply to their business. For instance, insurance, utilities, and using a vehicle for business. They can also take deductions based on the standard mileage rate.
Even if an individual is a full-time or W2 employee, that income is considered separate if they freelance on the side. By default, a freelancer is regarded as a sole proprietor. So, they are eligible to file Schedule C and take tax deductions for telecommuting expenses that apply to their business.
Real estate landlords
If an individual’s income source rents out real estate, they may have to file Schedule E. In this case, they are also eligible to claim deductions for relevant expenses that apply to their income source like advertising, utilities, cleaning expenses, etc.
The bottom line is that if an individual has their own business, including freelancing or a side hustle, they may be eligible for a home office deduction for telecommuting. However, if an employee has been teleworking, they will not be eligible for telecommuting home office tax deductions. Note that the tax deductions generally apply to business owners rather than employees.
There are special rules applicable to the taxpayers who use a portion of their homes to run a daycare facility. They get a deduction for the home space even if they use it for non-business purposes.
What is the Difference between Telecommuting Employees and Independent Contractors?
How do you understand whether an individual is an employee or an independent contractor?
Being an employer, you may be classifying your workforce right, but a few tend to make errors while segmenting employees and independent contractors.
But a few employers tend to make errors while segmenting employees and independent contractors.
So, here are some major aspects that you need to know regarding the difference between independent contractors and employees.
- Employees work directly for an employer, whereas independent contractors work separately from their clients.
- An employee gets the paycheck with tax withholding and a W-2 form at tax filing. Alternatively, independent contractors receive Form 1099-MISC for payments made in the previous year.
Besides these, the IRS looks at three factors when deciding whether an individual is an employee or an independent contractor. Here are the three factors you must consider.
- Financial – What are the financial terms involved in the employment? Does the company reimburse expenses and provide resources like tools or supplies?
If you reimburse expenses and provide tools for work, the individual is an employee or an independent contractor.
- Behavioral – To what extent can the company control the individual’s work? Can you instruct them on how to work and when to work?
If you can exert full control and supervise the individual, they are an employee or an independent contractor.
- Relationship – Is there a written contract or employee benefits? Is their work an essential aspect of your business? If yes, the individual is an employee.
What are the Telecommuting Tax-Deductible Expenses?
If one maintains a home office, there are certain expenses from an employer’s taxable income that one can consider as deductions. According to the IRS, here’s the detailing of expenses under telework tax deductions.
Partially Deductible Expenses
Under these expenses, one can deduct a part of the home expenses equivalent to the proportion of the home used for business or as a home office. For instance, if one uses 20% of the home as a home office, they may deduct 20% of the insurance utilities, depreciation, repairs, etc. One cannot deduct any expenses (lawn maintenance, repairing lights of another room other than the home office, etc.) related to the part of the home that is not used for business.
Fully Deductible Expenses
Under fully deducted expenses, one can deduct 100% of the costs incurred only because they have a home office, like a phone line or fax machine, printer, etc. These expenses may also include costs unrelated to the business directly buonly t apply to the home office—for instance, painting the office, renovation, etc.
Note: Employees cannot deduct any amount reimbursed by employers.
How to Claim Telecommuting Tax Deductions?
Claiming telework tax deductions isn’t complicated, especially when individuals take help from tax professionals or use taxation software. Even when individuals file taxes manually, those with self-employment income file Schedule C, wherein they fill in the line items for several expenses categories like business insurance and advertising. They use Form 8829 to calculate the allowable expenses for using your home for business purposes. The main catch here is to identify the ordinary and necessary business expenses.
Now, building a café in the home office because an individual wants mini coffee breaks all the time wouldn’t be a regular or essential expense for IT professionals. But if the individual purchases a printer for business purposes, that could be an expense in your tax filing.
People eligible for telework tax deductions must list the expenses they consider necessary for the business to generate revenue. Tax professionals can help identify which business expenses from the list qualify as necessary and ordinary expenses.
How to Calculate Telecommuting Tax Deductions?
There can be differences when calculating telework tax deductions based on what expenses one wants to deduct. One of the most prominent is the home office deduction for telecommuting among the deductions. This tax deduction allows homeowners and renters to reduce their taxable income as they primarily use a part of their home for business.
Note: If one uses the part of the home only during a specific time of the year, they can deduct expenses incurred during that time only.
There are two options to calculate home office deductions.
Under this method, one can deduct $5 per square foot used for business purposes, up to 300 square feet. Like, for a 250-square-foot home office, one could potentially get a deduction of $1250.
One can claim other home-related expenses like mortgage interest under Schedule-A used for itemized deductions.
Before the simplified method came into being in 2013, the traditional way was used to calculate tax deductions. Under this method, you can calculate the deduction based on the total cost of the home office, depending on the percentage used. For instance, if an office holds 10% of your home, one can deduct 10% of the home expenses – utilities, insurance, etc.
Further, under the traditional method, one can have tax consequences down the line. If the taxpayers sell the property at a profit, they will have to recapture the depreciation allowed earlier or is allowable for the part of the home used for business. They may pay up to a 25% rate in capital gains.
Manage Telework Taxes Seamlessly with Multiplier!
Staying up to date and managing telework tax deductions isn’t easy. Several employers still get confused thinking – Is teleworking tax deductible? So, isn’t it better to have professionals by your side so that you get expert assistance?
Multiplier, your onboarding partner, takes care of critical aspects like payroll, benefits, and taxes, while you can keep hustling with other aspects that require closer attention. Multiplier’s EOR solution assists you throughout the stages of setting up a remote team, irrespective of their location. To explore further, start your demo now!