As a result of the COVID-19 pandemic, more and more people are shifting towards working for home - an action that often calls for home office reimbursement. After all, you are now using your own utilities, paying the expenses on your own so that you can keep doing your job.
But what if these expenses become too much? When you were at the office, you had no issues with them - but now that you are home, what can you do? Are there any expenses that are tax-free? Are there any differences between employees and the self-employed?
Well, the answer to that depends. Keep reading to find out how a business should handle taxes for employees or people working from home.
If your employer lists you as an employee for tax purposes, then that's exactly what you are. Your employer is responsible for issuing Form W-2 every year, where they report your income to the IRS, along with any other potential compensations.
The fact that you are working at home - temporarily or not - does not make a difference to your status of employment. And as an employee, you won't be able to collect home office deduction even if you had no say in it (i.e., your office closed during the COViD-19 lockdowns).
To the employees, this rule may seem highly unfair. And to their defense, the tax deduction law wasn't this way before. Up until 2018, employees could take home office reimbursement, as long as they worked at home for the convenience of the employer.
That being said, along with the apparition of the Tax Cuts and Jobs Act of 2018, the home office deduction was taken off the table, and it will be that way all the way until 2025.
Unless something happens that causes Congress to change the law, employees may not receive home office reimbursement.
There are two ways in which a tax deduction is calculated: the home office simplified option and the standard option. The simplified option, like the name suggests, is easier and appropriate for those who do not really know how to deal with taxes. The tax break, however, is smaller.
The standard option involves more calculations, and it is often handled by a financial advisor. That being said, an accountable plan along with keeping records can lead to a bigger home office deduction.
It is recommended that in order to minimize home office expenses, self-employed individuals should try calculating their expenses using both methods. This way, they will know precisely which one holds better returns. Be careful because a high deduction/income ratio could trigger a home office deduction audit.
The standard option is the first one that a self-employed individual was given to start with. It's among the trickiest options for beginners, but if you were hoping to be tax-free and get a full home office deduction, then this was the way to go.
Using the standard option, you would be able to obtain full home office reimbursement. This includes the cost of painting, along with the costs of making repairs in that area in particular. So it is vitally important to record your actual expenses and track all your 1099 expenses.
You may also deduct some of the house expenses, as long as they are tied to your home office. For example, if your home office is 15% of the total home square footage, then you may also deduct 15% of your mortgage interest.
Rent and other utilities are also covered here. For instance, if your home office requires you to use electricity for multiple pieces of equipment, then you may have a percentage of that sum deducted.
Depreciation and property taxes from the home may also be deducted through the standard option. The calculations in this sense are slightly more complicated, but you should be able to get through by using Form 8829 from the IRS. Our home office deduction worksheet in excel can help you track your actual expenses for this option.
The IRS usually has all the information necessary for home office deductions. Therefore, if your place of business is in your home, then you might want to keep your receipts and check the expenses against IRS Publication 587.
Note: if you would like to claim the Standard Option and automatically track your expenses, try Bonsai Tax. Our software organizes and tracks all of your deductions to lower your tax bill at the end of the year. Try a 14 day free trial now.
If you cannot handle home office deduction through the standard option, then you may want to try the simplified deduction instead. This method was introduced in 2013 to take out the troubles of keeping records.
As a result, rather than keeping tax receipts for all of your home office expenses and undergoing fancy calculations, the simplified option will make matters easier to handle.
Rather than keeping records, the only thing that you'll have to do is to take your home office for business use and deduct $5 for every square foot. You may deduct up to 300 feet, which means a maximum deduction of $1,000.
If your workplace qualifies officially as a "home office," then you may take advantage of this tax break without going through all the trouble of calculating your expenses.
Bear in mind that there is a chance you'll get a lower deduction as compared to using the standard option. This is why financial experts recommend that you do both of them.
Employees may not be able to apply for home office reimbursement, but hope is not lost for them. In the majority of the circumstance, the company may pay for their home office expenses.
The condition here is that they would have to satisfy the requirements set by the IRS. If they do, then the home office reimbursement will be tax-free. Your employer will be able to write everything off as a business expense.
In some states, you might have some trouble getting your employee to agree - but in other states, this is actually required by the law. For instance, states such as Iowa, New Hampshire, Montana, Illinois, Pennsylvania, and California actually require employers to pay the job expenses that employees originally cover with their own money.
Your employee needs to have an accountable plan over what expense is covered and what is not. On occasion, even if an expense is not required as per the rules of the law, the employee may still decide to pay it.
They may even pay for personal expenses, as long as this is done for the benefit of the company. This is often done to maintain fairness at the job and to increase productivity along with morale.
With that in mind, not every state is required to do that, and your employer may not be under any obligations to make any payments for you. Make sure that you familiarize yourself with the law of your state on home offices.
The employer may pay reimbursements that are tax-free for any expenses, including mileage and other out of the pocket payments. As long as the expense was made while on the job, for the job, it has to be covered.
With that in mind, home offices may also be reimbursable and tax-free, as long as the business uses an accountable plan. As an employee, you may have your employer pay for home office reimbursement.
With that in mind, the office must meet the requirements as well:
First and foremost, you must be working at home out of necessity and convenience for your employee, not because you choose to work remotely. For instance, if your office closed down temporarily as a result of COVID-19 lockdowns, then the requirement has been met.
For a home office to be considered tax-deductible, it needs to be regular and used exclusively for your business. For instance, if you have an extra room that you use only for your business as you work from home, then you may get tax deductions for it.
As a self-employed person or even an employee, you may get a reimbursement if your office at home is a principal business place. It does not really matter whether you also have an open office elsewhere or not; in some cases, you may still get deductions.
For instance, let's say that you carry the business in a different location, but you frequently hold in-person meetings in your home office. In that regard, you may be able to receive reimbursement for that part of the house you use regularly for your business.
Many people have been working from home ever since the COVID-19 pandemic started. Obviously, all of the expenses that were taken care of by the company now fall into your hands at home.
Still, things are not as straightforward as we might want. Some people may be able to deduct their expenses as they work from home - but others will not have that possibility.
In 2018, the law changed, and people working for an employer would not be able to deduct expenses. The law has not changed all the way throughout 2021, even with the COVID-19 pandemic sending everyone to their home office.
Even if the home office expenses are occurring regularly and exclusively, there are no possibilities for tax deductions. Looking at it through the law's eyes, it is the job of the employers to reimburse any potential game-changing expenses.
However, things change when you are a self-employed person running a small business from home. In this case, you should be able to obtain a home office deduction. However, you need to meet the requirements set by the IRS for having your taxes deducted.
If the home office meets all the previously mentioned rules, then the employer will have to provide reimbursement under what is referred to as an "accountable plan." In that case, the reimbursements are tax-free.
In the event that the conditions are not met, the reimbursement will not be tax-free. Under certain special circumstances, they may write off the taxes, but they will still need to discuss matters with a tax advisor.
Home office reimbursement is provided for any expenses done for the purpose of a business. However, the circumstances under which it is given may depend. As an employee, you may not apply for reimbursement to the IRS yourself, but you may still have your employer apply for you instead.