Tax Tips for Employees Who Work at Home
Wednesday, March 16, 2022
Can you claim work from home tax deductions?
If you’re an employee, you can claim certain job-related expenses as a tax deduction, but only for tax years prior to 2018. For tax year 2018 and on, unreimbursed employee expenses and home office tax deductions are typically no longer available to employees.
The number of employees working from home has grown considerably due to the COVID-19 pandemic. Just a few years ago, these employees may have been eligible for tax deductions that were unavailable to in-office employees. Now, with only a few exceptions, only self-employed people are eligible to claim tax deductions when working from home.
Before you claim these deductions, be sure you meet the IRS’ criteria, or you could face additional taxes or penalties.
Who can claim 2021 tax deductions when working from home?
Since tax reform became law in 2018, generally only self-employed people can claim tax deductions when working from home. Working as an employee and for yourself doesn’t necessarily disqualify you from taking these tax deductions. The deductions have to be related to your self-employed income rather than your employee work.
Even in this situation, you’ll generally need to make sure your home office is only in support of your self-employment and not your job as an employee. For other expenses such as phone and Internet, you can split these between working for yourself, as an employee or as a personal expense. For deducting home office space, the IRS requires these expenses to be used exclusively for your self-employment work to be deductible.
To understand more about how you can claim tax deductions when working from home, take a look at the following tax tips for employees.
Tax Tip 1: Only deduct home office expenses if you only worked for yourself or in addition to a W-2 job.
Many employees work from home because it's convenient for their employer. For example, a salesperson who lives in a different state than company headquarters, may work from home rather than the company paying for office space.
If you only worked as an employee during the tax year, you can't typically claim home office expenses related to your work. If, however, you worked for yourself in some capacity, you might be able to deduct home office expenses.
If your home office is used exclusively and regularly for your self-employment, you may be able to deduct a portion of your home-related expenses, such as mortgage interest, property taxes, homeowners insurance, and utilities.
Remember, you typically can only claim these deductions if you are self-employed including if you also worked as a W-2 employee. Further, the home office deduction must be exclusively and regularly used for your self-employment activities.
Tax Tip 2: Keep thorough records and save receipts.
You need to keep accurate records of any expenses you claim as a deduction. The IRS recommends keeping a written record or log book in the event any questions arise about your deductions.
You should also save proof of payment for any tax-related expenditures. This proof may be in the form of a credit card or bank statement, canceled check, or itemized receipt. If you paid in cash, the receipt should include the payee's name, the date of the payment, and the amount. Digital records will usually satisfy this requirement as long as you can retrieve them when needed.
Tax Tip 3: Consider the simplified home office deduction to ease your record keeping
If you have a home office used as a space exclusive to your work as a self-employed person, you're typically entitled to claim the home office tax deduction on your tax return.
To claim a home office as a business expense, you must use part of your home or a separate structure on your property as a primary place of business. This includes uses such as greeting clients or customers, conducting business, storing inventory, using it as a day-care facility, or some other work-related purpose.
When eligible to claim the home office deduction on your taxes, you have two ways of claiming the deduction: the simplified method and the direct method.
The simplified method is just that: simple. You can use this method to determine your home office deduction on your return by expensing $5 per square foot of your office, up to 300 square feet or $1,500. The other option, the direct method, is more involved but could result in a bigger deduction.
Tax Tip 4: Consider taking the direct method if it provides a bigger deduction.
The other way to claim the home office deduction is by using the direct method. This involves tracking all of your home office expenses in addition to any costs related to repairing and maintaining the space. Further, you can claim deductions for a portion of other expenses based on the proportion of the space to the rest of your residence.
For example, if your home office represents 10% of your residence’s total square footage, you can claim up to 10% of your housing costs, such as utilities, mortgage interest or rent, and insurance.
Depending on the proportion of your home office’s square footage to your total home’s square footage and your housing expense, your deduction will likely vary depending on what method you use.
When using the direct method, you also need to account for depreciation of a portion of the house if you own it. You don't need to worry about calculating this when using the simplified method for taking the home office tax deduction.
Tax Tip 5: Each year you can switch between the simplified and direct method to take the biggest tax deduction.
To get the biggest deduction possible, you may need to calculate your deduction using both the direct and simplified methods to see which one comes out ahead for your taxes.
You don’t need any reason to switch from one method to the other year-to-year. Each year you can choose the method that yields the highest tax deduction.
How do you calculate the home office deduction as a self-employed person?
Calculating the home office deduction under the simplified method is straightforward. You take the square footage of your home office used exclusively for your self-employed business and multiply it by $5 per square foot up to a maximum of $1,500 per year.
The direct method, by comparison, requires more work on your part throughout the year and when preparing your return. But, it may also save you more on your taxes.
The direct method determines the home office tax deduction based on the percentage of your home office square footage to your entire home.
Divide the square footage of your home office by the square footage of your entire living space to calculate the percentage of your home that is dedicated to your home office. This percentage is then applied to your home expenses to determine what amount might be a business expense.
You can claim a percentage of expenses such as rent, mortgage interest, utilities, insurance, and repairs. Depreciation is also an allowable expense for a home that you own.
For example, if your office is 250 square feet and your home is 1,000 square feet, you'd deduct 25% of your allowable expenses (250/1,000 = 0.25). If you had $10,000 in eligible home-related expenses, you could claim up to $2,500 in deductions.
The direct method has no maximum deduction limit, making it more attractive in some instances than the simplified method. You may consider calculating both methods to help determine which method is best for your situation.
Can I use the same space for my W-2 job and side gig and still claim the deduction?
If you use your home office for your W-2 job and your side gigs, you won’t be able to claim your home office as a tax deduction.
The IRS allows you to deduct expenses for having a dedicated space where you regularly and exclusively conduct your self-employed business. This is true whether you live in a house, apartment, condo, mobile home or boat, as well as external structures like a barn, garage or workshop.
If you also use the space to work as a W-2 employee, the IRS doesn’t allow you to claim a deduction for this work space on your tax return since it isn't used exclusively for your self-employment.
If you have separate spaces for your employee job and for your self-employment work, then the eligible expenses for your self-employment space can still be deductible even though the expenses for your employee space isn't.
Tax reform changed the availability of deductions for employees who work from home. Now, you can only claim your self-employed expenses.
The best of both work worlds:
One option for employees who must pay for business expenses related to working at home, is to seek reimbursement from your employer. Reimbursements are typically tax-free as long as your employer has an accountable plan. This means they require you to submit an expense report or some other means of accounting for your expenses. Being reimbursed for an expense is almost always better than taking a deduction for the same expense on your taxes.
Written by Riley Adams, CPA