These days there is nothing novel about working from home. Since the pandemic began, 88% of organizations have mandated or encouraged employees to work from home to minimize the risk of contagion. And the number of stay-at-home workers will remain high even after the pandemic. According to a PwC survey, 78% of CEOs say remote work will continue post-COVID-19.
If you are one of the lucky ones who can work from home, then you are already familiar with the perks. You don’t have to spend time in rush hour traffic, you don’t have to pay for childcare, and you can show up for work in your sweats. It also means that you are paying your own expenses for things such as telephone and internet access. That means more work-from-home tax deductions, right? Not necessarily.
You would think that part of your business-related home expenses would be tax-deductible. Unfortunately, full-time employees can’t take advantage of work-from-home tax deductions, although there may be some tax breaks available depending on your situation.
What does work from home mean for you?
Not everyone who works from home is eligible for a home office deduction. If you are an employee with a full-time job and a paycheck and just happen to work from home, then you aren’t eligible for work-from-home tax deductions. It’s up to your employer to determine whether home office expenses can be reimbursed by the company. If you work as a freelancer, an independent contractor, a consultant, or are self-employed, then you are the company, so work-from-home deductions apply.
If you do plan to claim home office deductions, be clear about the standards for your home office according to the IRS tax code:
- Your home office needs to be a dedicated workspace. That doesn’t mean you have to dedicate a spare room as your home office, but you need space for a desk or work area.
- Your home office is a designated work area that is just for business. That means your home office is solely for administrative work or other tasks related to your business. It can’t be a shared personal/professional space, so the dining room table doesn’t count.
- Some special circumstances apply, depending on the nature of your business. For example, there may be exceptions if you run a daycare center in your home or if you have space dedicated to storing inventory or supplies.
If you are self-employed and aren’t sure how to claim the home office deduction, talk to a tax professional.
How do you calculate the home office deduction?
There are two basic formulae that you can use to determine your home office deduction:
The Simplified Option
To make it easy to claim your home office on your taxes, the IRS allows you to claim up to 300 square feet of home office space at a flat rate of $5 per square foot. That means you can claim up to $1,500 without itemizing home office expenses.
The Standard Option
If you prefer, you can deduct actual business expenses. That includes any improvements or furnishings for your home office space such as painting and repairs, furniture, and office equipment (although you may have to amortize big-ticket items).
You also can deduct a percentage of home operating costs, such as rent, mortgage interest, homeowner’s or renter’s insurance, electricity, utilities, and phone and internet services. You can even deduct a portion of cleaning services. The percentage is calculated by determining what portion of your home is dedicated office space. For example, if you have a 1,500-square-foot home and 300 square feet is for home office space, your home office deduction would be 20% of qualified expenses. You will have to file a Schedule C to itemize deductions.
Be sure to calculate other office expenses as well, such as the number of miles you use your car for business. Calculating home office deductions can be tricky, so you may want to work with a tax professional.
If you are only self-employed for part of the time, or if you were only working for yourself for a portion of the tax year, then that is the portion of the year you should use in your calculations.
How can businesses support home office workers?
With the pandemic, businesses have seen a spike in expense claims for home office equipment and services, such as chairs, desks, cables, and internet services. There are various ways that businesses can help pay for home office expenses:
- They can purchase equipment for work-at-home employees. Many companies give employees portable computing equipment. They can extend that policy to provide other office necessities as well.
- Businesses also can choose to adopt an accountable plan, reimbursing workers with tax-free money that can be deducted on corporate taxes. A nonaccountable plan would be an allowance to work-at-home employees to pay for expenses without the need for receipts, but the allowance would be considered taxable income.
- Employers also can choose to reimburse employees for the same home office deduction they would get if they were self-employed. This would require the employee’s home workspace to comply with IRS guidelines.
How can iQ help with your taxes?
When you are mapping out your tax strategy, including home office expenses, your credit union can help. iQ Credit Union offers savings or money market accounts so you can set aside cash for your quarterly estimated tax payments. We also offer individual retirement accounts (IRAs) and strategies to save tax-deferred money for retirement. Of course, we offer a full range of small-business banking services as well.
There is still time to file your 2020 taxes since the IRS extended the filing deadline to May 15. And it’s not too early to start planning for your 2021 taxes. A good place to start is with our e-book, The Ultimate Guide to Simple Savings.