The number of employees working from home grew considerably during the COVID-19 pandemic. While many companies are now requiring workers to spend time in the office, significant numbers are still working remotely at least part of the time. Estimates of the percentage working remotely vary from 28% (US Bureau of Labor Statistics) to 41% (Pew Research Center).
State vs. State
Remote work involves complicated tax issues for both workers and businesses. One major issue occurs when your company is in one state and your home workplace is in another state: Which one gets to charge you state income tax?
There is little coordination and some conflict between states on this issue. For example, New Hampshire sought an injunction against a regulation in Massachusetts requiring workers who previously worked in Massachusetts to pay its income tax despite working in other states due to the pandemic.
To avoid double-taxation — paying taxes on the same income in two different states — the taxpayer may be able to credit the taxes paid in their non-resident state against their home state’s tax liability (or vice versa, depending on which state has higher taxes). Consulting a CPA fluent with these complicated rules is recommended to help avoid double taxation.
Home Office Tax Deduction
In the past, home office tax deductions were available to workers who were paid as employees, through a W-2. That changed in 2018 and now only self-employed people (generally paid through 1099s) are eligible to claim tax deductions when working from home.
The home office must be a specific area dedicated to your self-employed business, for example, not a kitchen table that you use occasionally. There are two different methods that self-employed workers can use to determine the home office tax deduction: the direct method and the simplified method.
The direct method determines the home office tax deduction based on the percentage of your home office square footage relative to your entire home. Workers deduct a portion of home-related expenses, such as mortgage interest, property taxes, homeowners’ insurance and utilities, based on the proportion of the space to the rest of the residence.
Expenses also can include many costs related to repairing and maintaining the space, as well depreciation of a portion of the house if the worker owns it.
The other option is the simplified method. This method calculates the home office deduction by expensing $5 per square foot of your office, up to 300 square feet, for a maximum of $1,500.
If you use your home office for both your W-2 job and your side gigs, you won’t be able to claim the same home office as a tax deduction. You would need to maintain separate spaces for your employee job and for your self-employment work.
Employer Reimbursement
The best option for W-2 employees who pay for business expenses related to working at home, is to seek reimbursement from their employers. These reimbursements are typically tax-free as long as the employer has an accountable plan — requiring the employee to submit an expense report or some other means of accounting for expenses.
The accountable plan consists of a set of procedures that ensures that employees don’t get reimbursed for personal expenses. Under such a plan, an employer has options on how to structure home office reimbursement expenses, such as through a stipend or reimbursement policy. Being reimbursed for an expense is almost always more advantageous than taking a deduction for the same expense on your taxes.
If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
