Five Things You Need to Know About Taxes If You Work From Home
Working from home can be enjoyable work , but during tax collection times it can also raise some cryptic questions. Can you get a home office tax deduction? What about printer ink, a new monitor, or folder clips (even if you’re using them outside of your workspace)? Here’s what you need to know whether you are an employee who works remotely from home or self-employed.
Many of the same deductions and record keeping requirements apply to both self-employed and home-based employees, but there are some key differences. However, for both groups, taxes are not as straightforward as for office workers.
Pay-as-you-go tax system
When you receive a paycheck, whether you work from home or not, your employer takes care of your taxes, deducting federal, state, Social Security, and Medicare taxes from each paycheck, and even paying half of your Social Security amount. and taxes on free medical care. For the most part, you don’t have to worry about taxes for a year until you file your return.
If you are self-employed, calculating and filing your tax return will be much more difficult. 1099 could be wasted , you have to pay estimated taxes every quarter (tricky if you’re not sure how much you’re going to make from one month to the next), and there are roughly a billion things you may or may not be. the possibility of a deduction from your profits (some of them have strange categories, such as ” attrition ” in Chart C, the form for business profit or loss). You will also have to pay all self-employment tax (Social Security and Medicare) – 15.30% of your income – in addition to income tax when filing your return. Fun, isn’t it?
If you are a freelancer or running your own business, this complex tax issues mean that you definitely need to try to find a good tax specialist, to derive maximum benefit from the situation. If you work from home, your W-4 is fine-tuned and the rest of your tax situation is simple, filling out can be a breeze – except for the considerations outlined below.
Downsizing Your Home Office
A home office takeout – and whether you can accept it or not – is one of the more confusing but potentially lucrative takeaways. With it, you can write off expenses related to the area of your home that you use for work, such as rent or mortgages, room painting, property taxes, utilities, and home insurance. When calculating the deduction, you can use either the percentage of the home used for business or the newer simplified deduction of $ 5 per square foot of home office.
To make a deduction, whether you are an employee or self-employed, your home office or workplace must be regularly and exclusively used for business by at least one of these three criteria, according to the IRS :
- This place is your main place of work (most of your time and business tasks are done there and not elsewhere. If you work in the office five days a week, but sometimes take work home on weekends, this does not count)
- You use it to meet clients or customers there in the course of your normal business.
- This is a separate building that is not attached to your home (like a garage).
In addition, your workspace should not be a separate room, but should be “separately identifiable” —it is a separate area used only for work. If you are working with your laptop on the dining table, this will not help you. (Tip: Take a photo of your workplace or office in case of an audit.)
The rule of exclusivity invalidates many home offices. The territory cannot be used for any personal purposes. No random guests in your office / guest room, no movie nights in your office / study. And you can’t play video games on your computer in the office unless, fortunately, your career is not related to video games. (There are a few exceptions to the exclusivity rule, for example if you store business inventory in this multipurpose space.)
Convenience of the employer’s rule for home-based workers
When you work from home, you have another important requirement: you must work from home “for the convenience of the employer.” Basically, this means that your employer requires you to work from home, and not just like that. If you can get in writing from your employer that you need to work from home, you are golden.
If you convinced your boss to let you work from home because you have more work there, or you have moved overseas to hang out with your trucker girlfriend, you may not be eligible for the deduction. The IRS regards this as an arrangement for your convenience. On the other hand, if your company is completely virtual and you do not have an office in which to work, or if you have to work after hours when the regular office is closed, this is for the convenience of the employer and you should be able to go ahead and take a deduction. if the other requirements above are met.
IRS Publication 587 provides official details.
Obtaining tax incentives for working expenses
Writing off programs, books, gadgets and anything else you find in Staples is great, isn’t it? Like taking a home office deduction, business-related expenses can be tricky.
As an employee, “ordinary and necessary expenses” for your job can be deducted from your taxes on Form 2106, Employee Business Expenses . These work-related expenses should relate to those expenses that your employer has not reimbursed or reimburses you, such as the tools you need to get your job done, professional certification fees, trade magazine subscriptions and, yes, paper clips (used for Work). You may deduct long distance calls from your phone bill, but not other elements of the phone bill, unless it is a second line used only for work.
However, there are other important tricks as well. First, you need to itemize your deductions to deduct these unreimbursed employee costs; the standard deduction may be higher depending on your circumstances. In addition, employee costs are included in the various deductions that have a limit. A deduction can only be deducted for your total other deductions in excess of 2 percent of your Adjusted Gross Income (AGI). For example, if you make $ 50,000 and have a total of $ 1,500 in various deductions, you will only be able to deduct $ 500 (since 2% of $ 50,000 is $ 1,000).
The bottom line for most homeworkers is that you are probably better off having your employer reimburse you in full for your work expenses than relying on this tax credit.
On the other hand, self-employed individuals have no limits on business-related expenses that will reduce your overall bottom line. That way, everything you use to work – from houseplants on your desk to your website hosting fees – can be deducted to lower your tax bills. Staples has a list of 25 common business deductions and expenses that you can take advantage of, but again, you probably want to see a tax pro to help you find all the deductions you are eligible for.
Homework Tax Penalty
Finally, there is another type of tax that home workers may need to be aware of. This is called a “teleworking tax penalty,” where if you work outside your employer’s state, you may be taxed in that state as well as yours. In other words, double taxation.
The Huffington Post explains this convoluted policy :
It all boils down to a little-known problem with how states calculate income taxes. You see, all states have the power to tax their residents’ income, no matter where those residents are when they are earning. But some states, including New York, have rules that everyone, whether resident or not, must pay government income tax on every penny they earn while working for a state-based company, even in those the days when they themselves physically work elsewhere. In addition, there are states, including Connecticut, which require , to the same employees pay state income tax for every penny they earn, physical work in his state, even if the work they perform, designed for companies outside state.
Embarrassed? In practice, this means that if a hypothetical employee, Joe Goodworker, a Connecticut resident, works at Wayne Enterprises in New York, but works from home once or twice a week because he hates commuting, or has young children, or even (ahem) who is sometimes prevented from commuting to work, the money he makes on the days he works from home is subject to income tax in both New York and Connecticut.
Nicole Goluboff, an attorney, a lawyer and author of “The Law on the remote work”, highlights in this presentation of the problems associated with these tax penalties for remote work . Basically, the four states – New York, Delaware, Pennsylvania, and Nebraska – have an “employer convenience” rule that essentially says the only way you can avoid nonresident government taxes if it is impossible for you to do your job in this condition. There is no formal rule in New Jersey, but in general it is applied as well.
Some states issue a tax credit for nonresidents that other states charge on your income, but you still need to file a tax return for that other state. It is also possible that your general state tax liability will be higher, depending on how taxes are calculated for your state, notes the Kessler Orlean Silver CPA .
This is not entirely true for homeworkers, and it also affects the bottom line of the company, as they may have to pay government taxes even for one single employee working from home in another state. This is why HR 4085, State Employee Tax Fairness Act 2014 ; if passed, it will prohibit states from levying income tax on non-residents working from home. However, the last action was taken in March 2014, so for now, if you work from home and your employer is out of state, you probably want to consult with a tax advisor to make sure everything is okay for you.
Working from home can make your taxes even more difficult than they already are, but if you are aware of the problems, you can make the most of your income.