Tax Deductions for Employees who Work from Home

If you’re an employee of a company and you work from home, you’re amongst a group that’s growing in size. Thanks to the pandemic, millions of employees now work remotely or telecommute. But, unfortunately, there aren’t any tax deductions for your home office or work expenses you can deduct due to working from home as an employee.

However, if you are a freelancer or contractor you can take business deductions, including a home office deduction.

What’s Changed With the Home Office Deduction?

So since the 2018 tax year, any sort of employee expenses that are not reimbursed by your organization are not tax-deductible. And as mentioned, individuals who work from home have become associated with a big chunk of the workforce. That said, this has a big impact.

Before the tax reform bill that came in 2018, you could deduct employee-related business expenses. This included any home business office expenses (assuming you were a staff member who telecommuted). However, the new income tax law removes miscellaneous itemized tax deductions for employees.

It’s equally important to know that the new income tax legislation may affect your taxable income--your state taxable earnings are similar to federal tax. While some states use their definition, the majority of states use the federal adjusted gross income as a base for taxable earnings.

If you worked from home during the pandemic, you won’t be able to take the home office deduction in 2021. Also, if you’re an employee, you can no longer deduct out-of-pocket expenses.

Materials and equipment needed for the job
Business-relevant travel and meal costs
Expenses for schooling
Professional licensing costs
Professional society dues
Job Hunting Expenses
Uniforms or work clothes

All of these were discontinued after the Tax Cuts and Jobs Act of 2017 and can no longer be deducted.

Who can take the home office deduction in 2022?

The good news is that the write off wasn’t COMPLETELY wiped out. But it’s only in effect for self-employed people.

Also, you can find a select number of employed staff members who may be qualified to take a home business office deduction for any expenditures that weren't reimbursed by their company.

Some examples are remote personnel that have specific job expenses linked to impairments, government officials (either state or local) that are fee-based, those involved with the Armed Force reserves, and some types of artists.

For people who fit into this little group, you'll also have to show your remote working costs are an ordinary expense (meaning, it can't be an over-the-top version of what you need), accrued or paid for in the current tax year, and completely essential to do the job.

State Taxes as a Remote Worker

Your state regulations may not be the same as the federal income tax legislation in how they tax remote workers, which just adds to the confusion. Also, they may have a different means of considering employee earnings and income tax deductions (including the home office deduction).

Workers who operate remotely will pay income tax in the state where they perform their job. As an example, if you live in Pennsylvania and work at home, but your company is based in Ohio, the company will have registered in Pennsylvania, and your W-2 will show income taxes withheld from Pennsylvania.

If you aren’t sure which state you should pay your taxes to or what deductions you’re allowed to take, I would recommend you contact both a tax professional.

Contractor or Employee?

Are you an independent service provider or an employee who works remotely? In case you don’t know, you absolutely should. Be sure that you have an understanding of the main difference between someone who has a home-based company and being an employee who telecommutes (i.e., works remotely).

An employee is somebody that works directly for the employer. Alternatively, an independent contractor is self-employed and the company they do work for is their client.

If you receive a W-2, you are an employee. If you receive a 1099, you are an independent contractor.

The IRS is the one that decides if you’re a contractor or employee. There are three different things they look at during their determination:

Whether the business and staff member possesses a written contract or employee benefits and if the job is often a vital aspect of the business
Whether or not the business controls or has the right to control precisely what the staff member does when they do the job, as well as how the employee is performing their job
Whether the company controls employee compensation, reimbursed expenditures, and supplies tools and materials

It’s important to remember that the IRS is going to make its determinations on an individual basis. They take a look at the total worker-to-organization connection, not merely one element. Now, if you happen to be an independent contractor, you’ll file Schedule C with your taxes. This form permits you to deduct business-related expenses, which ultimately lessens your tax bill.

Home Office Deduction as a Freelancer

You can qualify for the home office deduction if you have a space in your home that you use regularly and exclusively to run your business. This means if you work from the kitchen table you don’t qualify; but if you work from a spare bedroom (and you don’t use that space for anything else) then you would qualify.

You can take a home office deduction in one of two ways. You can figure out the percentage of your home used for business and deduct indirect expenses. Indirect expenses include things like utility bills, property taxes, insurance, etc. So for example if your office is 10% of your home then you could deduct 10% of your electric bill, 10% of your property taxes, etc.

There is also a simplified option where you can take a deduction of $5 per square foot. So if the spare room you are using as an office is 120 square feet you could take a deduction of $600. The maximum office size for this simplifiedd option is 300 square feet.

Bottom Line

If you are a W-2 employee there are few, if any, work from home deductions you qualify for. But if you are a freelancer you can deduct your home office as well as other business-related expenses.