A few very specific types of W-2 employees can still take the home office tax deduction, but we’ll talk about that in a minute. If you need more information about remote work taxes, this section answers the most common questions remote workers and their employers are asking. Businesses must stay up-to-date on changes in tax laws in response to the increasing popularity of remote work.
Do remote workers get a tax break?
Although you can't take federal tax deductions for work-from-home expenses, if you are an employee, some states have enacted their own laws requiring employers to reimburse employees for necessary business expenses or allowing them to deduct unreimbursed employee expenses on their state tax returns.
If you and your spouse are both teachers, that can be up to a $500 tax deduction. Yes, an accountable plan is a plan set up by employers to reimburse employees for business-related expenses. As long as the plan follows IRS regulations, employees can be reimbursed for necessary business expenses. TurboTax is also up to date with individual state laws, so you don’t need to know if your state allows unreimbursed employee deductions.
Who Is Eligible for a Work from Home Allowance?
Many states have reciprocity agreements that allow benefits of working remotely to live in one state and work in another without getting double-taxed, so you can likely avoid owing more than you’d like. Before you panic about your tax bill, remember that every tax situation is different (and most people won’t get taxed twice). “A lot of people are moving around, so there could be more complicated tax implications,” says Scott Taylor, CFA, a financial advisor at Northwestern Mutual. “There are certain states and certain situations where you could be double taxed.” There’s no doubt that remote work has gained momentum over the last few years. Many companies are permanently rethinking their approach to working outside the office as employees express interest in the perks of working from home.
This percentage is then applied to your home expenses to determine what amount might be a business expense. 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. First, the IRS only allows you to deduct expenses above 2% of your adjusted gross income.2 So if your income is $50,000, your threshold to begin claiming expenses is $1,000. We hope this guide helped you get a handle on what your tax liabilities could look like as a remote worker.
When a company has a remote employee with out-of-state payroll, that typically creates nexus in that state for the company, unless a specific exception is met. When nexus is established, also known as physical presence, a company can create additional filing requirements for themselves, in addition to having to withhold income taxes on the employee’s wages. With the regular method, you’ll need to keep records of your eligible home office-related expenses such as homeowners insurance, mortgage interest, utilities and repairs. You’ll be able to deduct a percentage of eligible expenses based on the size of your workspace. If your home office is 10% of your home’s total square footage, then you can deduct 10% of the eligible expenses. There isn’t a hard limit on how much you can deduct for home office expenses.
Most state tax rules for working from home are in relation to those who live in one state and work for a company located in another state. Most of these were drawn up long before COVID-19, and assume a worker physically commutes across the state line. “Only expenses exceeding 2% of the taxpayer’s adjusted gross income are deductible, and the deduction is only allowed if the taxpayer itemizes ,” she said. The only tax provision for individuals spurred by the pandemic was a CARES Act provision that allowed those taking the standardized deduction to also deduct up to $300 in charitable contributions. There is nothing work-related most people who are employees working from home can write off when filing taxes in 2023, Logan said.
You may not be able to deduct home office expenses
This blog does not provide legal, financial, accounting, or tax advice. ADP does not warrant or guarantee the accuracy, reliability, and completeness of the content on this blog. The pandemic accelerated trends that were already occurring such as advances in technology that allowed businesses to offer more flexible work schedules and hybrid or remote workplace options. Whether it be for your own organization, your clients or both, it’s important to be aware of a number of compliance challenges and considerations. The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. , offers investment services and products, including Schwab brokerage accounts.
What’s important is that it be made under an accountable plan, meaning, a set of procedures that ensures that employees don’t get reimbursed for personal expenses. IRC Section 139 deals with disaster relief payments from the employer that are generally tax free to the recipient. The COVID-19 pandemic was declared a disaster by the federal government and the covered period for expenses to qualify started March 13, 2020. The IRS hasn’t published updated guidance following the COVID-19 pandemic. Thus, taxpayers should follow previous rules and guidance and apply them to their specific facts and circumstances. Only the amount of space you actually dedicate exclusively to work can be counted.
There are 16 states that have reciprocal agreements with other states, allowing workers to only file in their home state. 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 on your tax return, the IRS requires these expenses to be used exclusively for your self-employed business.