Understanding tax deductions for employees who work from home

If you’re like me, at one point someone said “and it’s all deductible!” to you in passing, and now you’re wondering what they actually mean by “all”.

As more and more companies accept remote work, more and more employees are wondering if their snack budget is a write-off.

Don’t get audited! Understand the tax deductions available to you, as well as the tax differences between being self-employed versus full-time remote.

I’m not a CPA, but I do my own taxes and have worked remotely for 15 or so years. I’m depreciating my second printer. It should go without saying, this is not tax advice and you should discuss your specific tax issues with your CPA, the appropriate city/county/state/federal regulators and a lawyer, if you’re really in it deep.

Deductible Expenses

If you work from home, you may be able to deduct certain expenses on your tax return. The IRS allows two methods for calculating the home office deduction:

1. Simplified Method: This method allows you to claim a standard deduction of $5 per square foot of your home office, up to a maximum of 300 square feet (except daycares). This method is simple and straightforward, but it may not be the most beneficial for everyone.

2. Regular Method: This method requires you to calculate your actual expenses, including things like rent, mortgage interest, utilities, and maintenance. To qualify for this deduction, you must use your home office regularly and exclusively for work purposes.

Expenses that may be deductible under the regular method:

• Mortgage interest or rent payments

• Utilities, such as gas, electric, water, and internet

• Insurance, such as homeowners or renters insurance

• Repairs and maintenance

• Depreciation of your home office equipment, furniture, and property

Note that if you are an employee who works from home, you can only deduct these expenses if your employer requires you to work from home and does not reimburse you for these expenses. If your employer reimburses you, you cannot claim the deduction.

Tax Differences for self-employed vs. full-time remote employees

If you are self-employed, you may be eligible for additional tax deductions and credits that are not available to full-time remote employees.

Here are some of the key differences:

• Home Office Deduction: While both self-employed individuals and full-time remote employees can claim the home office deduction, self-employed individuals may be able to deduct a larger percentage of their home-related expenses, since their home office is used exclusively for business purposes.

• Business Expenses: Self-employed individuals can deduct a wider range of business expenses than full-time remote employees, such as marketing and advertising costs, business travel expenses, and professional development expenses.

• Self-Employment Tax: Self-employed individuals are responsible for paying both the employer and employee portion of Social Security and Medicare taxes. Full-time remote employees only pay the employee portion, which is typically 7.65% of their income.

But wait, there’s more

If you are self-employed, you may be eligible for additional deductions that can help reduce your tax liability. Here’s where a pro can help you make sure you exhaust the full list of home office deductions that are available to you. Some, but not all, include:

• Health insurance premiums: Self-employed individuals can deduct the cost of health insurance premiums for themselves, their spouse, and their dependents.

• Retirement contributions: Self-employed individuals can deduct contributions to a retirement plan, such as a SEP-IRA or a Solo 401(k).

• Home office expenses: In addition to the home office deduction, self-employed individuals may be able to deduct a portion of their home-related expenses, such as property taxes and mortgage interest.

• Business use of your car: If you use your car for business purposes, you can deduct the actual expenses or use the standard mileage rate.

Don’t file your taxes without fully understanding what you can deduct, and how much. Keep the receipts because if you get that call from the IRS, you need to be prepared to back up your books and your returns.