Since the COVID-19 pandemic, the number of remote workers has increased threefold. Optima Tax Relief reviews tax tips for remote workers.
Many remote workers want to know if they are allowed to deduct home office expenses. The rules of this particular deduction are rather specific so remote workers should ensure they are claiming this deduction properly. Whether or not a taxpayer can claim the deduction depends on their employment status and the space in which they work. Since the passing of the 2017 Tax Cuts and Jobs Act, employees may not claim the home office deduction if they receive a paycheck or W-2 from an employer. This rule is in effect until 2025. In other words, if an employee receives a W-2 from their employer, they cannot deduct work expenses during tax time, even if they work exclusively at home. What they can do to offset any additional expenses is ask their employer for expense reimbursement.
On the other hand, business owners, freelancers and contractors who receive a Form 1099 for earned income can claim a home office deduction. To qualify, the space must be used exclusively for business use. There are two methods used to determine how much can be deducted from a tax bill: the simplified method and the regular method. As you look beyond the pandemic, Deloitte can show how the tax function can play a bigger role to help protect and create value for your business. Our experienced tax and human capital professionals and innovative technology solutions can support you. Together, we can align your strategy, policy, and operations to address the potential talent and tax implications of hybrid and remote work.
The simplified method allows a taxpayer to deduct $5 per square foot of office space for up to 300 square feet, or $1,500. With the regular method, the taxpayer will need to keep records of all eligible office-related expenses, and then deduct the percentage of eligible expenses based on the size of the workspace. Eligible expenses can include homeowner’s insurance, mortgage interest, utilities, property taxes, and repairs. For example, if a taxpayer determines that their home office is 15% of their home’s total square footage, they can deduct 15% of their eligible expenses. If expenses totaled $15,000 for the year, the taxpayer could deduct $2,250. In this case, using the regular method would be more beneficial as it would allow a greater deduction than the simplified method’s $1,500 cap. While there is no maximum to how much can be deducted, it cannot exceed the business’ net income.
In addition to the home office deduction, self-employed individuals should also try to track other work-related expenses. This can include the vehicle mileage used for business purposes, and a percentage of a phone or internet bill that is used for business purposes. Keeping good records and receipts will be crucial in case of an audit.
Finally, remote workers should be mindful of state and local tax codes where they live and work. Sometimes, workers live and work in different states, making filing a little more difficult. Generally, taxes are owed in the state a taxpayer lives in, but working in a different state will require them to file a nonresident tax form in the state(s) they worked. They will need to list the amount of income and taxes paid in each state they earned. It might be helpful to have your taxes prepared by a professional as the rules for withholding, deductions, and credits can vary by state.
