The COVID-19 pandemic has made telecommuting a necessity for the majority of the workforce, with almost half of American workers currently working from home. While some people have always chosen the telecommuting life, others made the change for the first time in response to the stay-at-home order in early 2020. Today, the virtual workforce is twice as large as it was between 2017-18—and this figure is only expected to increase. Experts say that productivity has shown no signs of dropping, and by 2025, 70% of the workforce will spend the majority of their time working OOO.
Over the last year, people have been able to get creative about where they chose to work. Maybe you had to create a home office where there never was one, move back to your parents’ house, or opted to rent an Airbnb in the mountains with your bubble to wait out the crisis.
But now that it’s tax time, it’s important to know how all of these changes can and will affect your taxes this year.
To claim, or not to claim—that is the question
Excited about claiming lots of new home office expenses on your 2020 taxes? You’re not alone. A new home office—whether it be in a larger space, a closet, your garage, or the cupboard under the stairs—comes at a cost. You may have had to pay higher utility costs, upgrade to a faster internet plan, buy a new Wi-Fi router to handle the entire household’s upsized bandwidth, get new furniture, buy new equipment, or pay for something else to enable your family’s remote working.
But here’s the rub. Your eligibility to claim these expenses as deductions pretty much comes down to one question: Are you an employee or an independent contractor? For employees with no other option than to work from home due to the pandemic, the Tax Cuts and Jobs Act (aka the TCJA) eliminated deductible expenses tied to maintaining a home office in 2018. One of the home office deduction’s principal requirements is that space must be the primary location for your business and be regularly and exclusively used for that business and that business alone.
Suppose you are a contractor/small business owner that qualifies. In that case, there is a chance that you could deduct a portion of your HOA fees, utility bills, home insurance premiums, and even the expenses you may have racked up for any home office changes made due to COVID-19. Even still, any deductions will depend on specific circumstances, including what percentage of your home is used exclusively for your business. Claiming this deduction won’t automatically trigger an IRS audit, but you’ll still want to keep detailed records of receipts, any canceled checks, and all documentation that proves your home office isn’t used for another purpose than your business.
Not a small business owner but still have expenses tied to your new work situation? Start by talking to your employers. They may be able to help with the extra money you’ve spent on your home office as a result of the COVID-19 pandemic. Many businesses have provided supplies including computers, monitors, software, office supplies, and even office furniture for their telecommuting staff.
You can also ask your employers about an accountable plan, which some companies have used to reimburse their employees for certain home office expenses. It allows employees to receive tax-free money for business-related expenses from the business while the employer deducts for these costs, saving on payroll taxes. But as always with the IRS, it’s important to read the fine print. In order to use an accountable plan, the business must meet the following guidelines for expenses to be excluded from W-2 employee wages:
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Expenses have a business connection that the employee can substantiate on a timely basis, and
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Employees must return any excess allowance they are unable to substantiate to their employer.
It’s important to keep in mind that your company not only wants you to survive, but to thrive while working from home. Most are looking for ways to support their employees and build company culture with an amazing WFH experience during this time. That includes learning new ways to help employees to remain happy and productive—and no one is at their most productive sitting on the kitchen floor with their laptop propped up on a cardboard box.
Out of state, out of mind? Think again
A big perk of telecommuting is the ability to work for any company, no matter their location. However, if you work away from the state you call home, you may have tax reporting and payment obligations in your temporary location. If you’ve temporarily moved states, first let your employer know so that you can make sure that your state-level withholding is accurate. Then talk with your tax professional so that they can advise you whether you should change your withholding to avoid a big payment in April. States often have established workarounds to help mitigate the complexity for taxpayers in this situation. Some states have even declared that they won’t consider employees working from home solely due to COVID-19 as physically working in that state. However, many other states have yet to issue any guidance on the matter at all, so unless you’re familiar with the specific laws relating to your situation, it’s best to get an expert’s advice.
The #WFH life has its perks—no commute, a broader range of job opportunities, being able to customize your workspace and being able to turn off the camera when it’s just one of those days, for a start. But when it comes to tax time and all the extra costs that are bound to come up this year, it is essential that you do your research and keep it honest. We also recommend that you consult a tax professional to help dot the I’s and cross the T’s, especially this year.
