Taxes

Tax Deductions for Employees who Work from Home

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If you’re an employee of a company and you work from home, you’re amongst a group that’s growing in size. Thanks to the pandemic, millions of employees now work remotely or telecommute. And historically, one of the added benefits for working at home was your ability to take tax write-offs on a home office in your tax return (among several other deductions).

But sadly, you can’t do this anymore. That’s right. In case you missed the news, this perk went away a couple of years ago. As a salaried employee, you used to be able to take deductions for specific job-related expenses. But that ended in 2018.

In this article, I’ll lay out exactly what has changed, what you should know, and how to best manage your unreimbursed expenses. Let’s first start with the biggest disappointment - the home office deduction.

What’s Changed With the Home Office Deduction?

So since the 2018 tax year, any sort of employee expenses that are not reimbursed by your organization are not tax-deductible. And as mentioned, individuals who work from home have become associated with a big chunk of the workforce. That said, this has a big impact.

Before the tax reform bill that came in 2018, you could deduct employee-related business expenses. This included any home business office expenses (assuming you were a staff member who telecommuted). However, the new income tax law removes miscellaneous itemized tax deductions for employees.

It’s equally important to know that the new income tax legislation may affect your taxable income--your state taxable earnings are similar to federal tax. While some states use their definition, the majority of states use the federal adjusted gross income as a base for taxable earnings.

If you worked from home during the pandemic, you won’t be able to take the home office deduction in 2021. Also, if you’re an employee, you can no longer deduct out-of-pocket expenses.

  • Materials and equipment needed for the job
  • Business-relevant travel and meal costs
  • Expenses for schooling
  • Professional licensing costs
  • Professional society dues
  • Job Hunting Expenses
  • Uniforms or work clothes

All of these were discontinued after the Tax Cuts and Jobs Act of 2017 and can no longer be deducted.

Who can take the home office deduction in 2022?

The good news is that the write off wasn’t COMPLETELY wiped out. But it’s only in effect for self-employed people.

Also, you can find a select number of employed staff members who may be qualified to take a home business office deduction for any expenditures that weren't reimbursed by their company.

Some examples are remote personnel that have specific job expenses linked to impairments, government officials (either state or local) that are fee-based, those involved with the Armed Force reserves, and some types of artists.

For people who fit into this little group, you'll also have to show your remote working costs are an ordinary expense (meaning, it can't be an over-the-top version of what you need), accrued or paid for in the current tax year, and completely essential to do the job.

State Taxes as a Remote Worker

Your state regulations may not be the same as the federal income tax legislation in how they tax remote workers, which just adds to the confusion. Also, they may have a different means of considering employee earnings and income tax deductions (including the home office deduction).

Usually, workers who operate remotely are going to pay income tax in the state where they perform their job. As an example, if you live in Pennsylvania and work at home, but your company is based in Ohio, the company should have their company registered in Pennsylvania, and your W-2 will show income taxes withheld from Pennsylvania.

If you aren’t sure which state you should pay your taxes to or what deductions you’re allowed to take, I would recommend you contact both a tax professional as well as your company’s human resources department. HR will undoubtedly help, but they’re not necessarily tax professionals.

Taxable Earnings as a Remote Worker

It’s equally important to know that the new income tax legislation may affect your taxable income--your state taxable earnings are similar to federal tax. While some states use their definition, the majority of states use the federal adjusted gross income as a base for taxable earnings.

If you have business expenses to deduct, you’ll report all of them in Form 2106—Employee Business Expenses—and also attach it to your Form 1040. The tax-deductible expenses coming from Form 2106 are inserted on Line 21 of Schedule A, Itemized Deductions. Obviously, if you use great tax software, this will be done for you automatically.

Contractor or Employee?

Are you an independent service provider or an employee who works remotely? In case you don’t know, you absolutely should. Be sure that you have an understanding of the main difference between someone who has a home-based company and being an employee who telecommutes (i.e., works remotely).

It sounds like a no-brainer, but to spell it out, an employee is somebody that works directly for the employer. Alternatively, an independent contractor operates separately from the customer.

To be more specific, if you get a form 1099-MISC at the outset of the year for any earnings the prior year, you’re viewed as an independent contractor. Alternatively, when you get a W-2 every year in addition to a regular paycheck (including income tax withholding), you’re an employee.

The IRS is the one that decides if you’re a contractor or employee. There are three different things they look at during their determination:

  1. Whether the business and staff member possesses a written contract or employee benefits and if the job is often a vital aspect of the business
  2. Whether or not the business controls or has the right to control precisely what the staff member does when they do the job, as well as how the employee is performing their job
  3. Whether the company controls employee compensation, reimbursed expenditures, and supplies tools and materials

It’s important to remember that the IRS is going to make its determinations on an individual basis. They take a look at the total worker-to-organization connection, not merely one element. Now, if you happen to be an independent contractor, you’ll file Schedule C with your taxes. This form permits you to deduct business-related expenses, which ultimately lessens your tax bill.

Some Other Strategies for Remote Workers

If you fit into the self-employed or business owner categories, then you should really consider taking the Deduct Everything course from Cofields Concepts. Carter Cofield (CPA, PFS) created the course specifically to help entrepreneurs maximize their business deductions and lower their tax bills. And the course teaches side hustlers how to save on taxes too.

Save Receipts and Be Thorough

Keep correct records for any business expenses you claim as a deduction. The IRS advises using a written logbook in the event questions arise relating to the deductions, but you can also just keep track of this information on your computer (try Mint, or Quicken).

You should also keep evidence of payment for all tax-related expenses. This could mean a canceled check, itemized sales receipt, or bank statement. Note that if you pay in cash, your receipt needs to have the payee’s name, the amount, and the date of the transaction. Personally, I’d avoid using cash for business expenses, though.

Track Your Travel

In case you’re utilizing your car for business-relevant travel, or perhaps you cover meals and accommodations using your own funds, you might get an income tax deduction. First off, keep in mind you can’t write off any business expense your workplace already repaid or is going to repay.

However, one little hack to know about is the mileage write-off. In case your organization only refunds a part of the basic business mileage rate, you're able to deduct any extra amount to each mile. So if your company gives you 50% of the mileage, you can write-off the other 50%. In case this is happening a lot, I would talk to a tax professional, considering this could get dicey in exactly how you're calculating mileage.

Comparing the Best Tax Software Programs

BrandBest For
Cash App TaxesAll Individual Filers
TurboTaxOverall Features
TaxACTFreelancers
H&R BlockFree Filers

Bottom Line

Taxes for remote workers can get super complex, so I always recommend talking to a tax professional if you have a lot of work-related expenses as a remote worker. Unfortunately, most of the tax benefits you used to get are no longer available, so you have to make sure you’re tracking everything meticulously so you can make the most out of your tax return.


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