Changes in Home Office Tax Deductions for Telecommuters

How Recent Tax Law Changes Affect Telecommuting Employees

Home Office Tax Deduction

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If you work from home as an employee of a business, you’re among a growing group of 4.7 million employees who telecommute as of 2019.

One of the benefits of telecommuting has been the ability to reduce income taxes by taking a home office deduction on your personal tax return. That deduction is no longer available to employees who work from home, beginning in 2018.

Changes in the Tax Law

In an interview between The Balance SMB and CPA Gail Rosen, Rosen explained that before the new tax law, you could deduct employee business expenses—including the home office expenses for employees—as a miscellaneous itemized deduction on Schedule A. The new tax law eliminates the tax deduction for miscellaneous itemized tax deductions; this includes the home office deduction for employees.

This means that if you are an employee who works for a company, the employee expenses that your company doesn’t pay for are no longer available; this includes the home office deduction. However, this does not mean that the home office deduction was eliminated. It is still in effect for self-employed individuals.

In addition to the home office deduction, other unreimbursed expenses you can no longer deduct include: 

  • Fees for professional licensing 
  • Dues to professional societies
  • Educator expenses
  • Tools and supplies
  • Business travel and meals expenses

Some types of employees may still be eligible to take a home office deduction for unreimbursed employee expenses:

  • Armed Forces reservists
  • Qualified performing artists
  • Fee-basis state or local government officials
  • Employees with impairment-related work expenses

These employees must be able to prove that their telecommuting expenses are 

  • Paid or incurred during your tax year
  • For carrying on your trade or business of being an employee
  • Ordinary and necessary

Telecommuting Employee vs. Home Business

Are you a telecommuting employee or an independent contractor? Be sure you understand the difference between being a telecommuting employee and having a home-based business. An independent contractor works separately from the client, while an employee works directly for an employer. 

  • If you receive a paycheck with withholding for federal and (maybe) state income taxes and for FICA taxes (Social Security and Medicare), you are being paid as an employee.
  • If you receive a 1099-MISC in January for payments for the previous year, you are being paid as an independent contractor. 

The IRS decides whether a worker is an employee or an independent contractor. They look at three factors in their analysis:

  1. Behavioral: If the company controls or has the right to control what the worker does and how the worker is doing their job
  2. Financial: If the company has control of worker pay, expense reimbursements, and provides tools and supplies
  3. Relationship: If the company and worker have a written contract or employee type benefits, and whether the work is a key aspect of the business

The IRS makes its decisions on a case-by-case basis. They look at the entire relationship, and not just one factor.

If you are an independent contractor, you would file a business tax form on Schedule C as part of your personal tax return. Schedule C allows you to deduct business expenses to reduce your business tax bill and the net income (or loss) from your business is included with your other income on your tax return, Of course, being an independent contractor has both benefits and drawbacks.

Telecommuting and Your Taxable Income

The change in the federal tax law may affect your taxable income. The income tax base (taxable income) for state tax purposes is similar to the federal tax. Most states use the federal adjusted gross income as a base, while other states use their own definition. Even states that start with the federal AGI make adjustments (Adjusted gross income (AGI) is gross income minus adjustment.) 

The new tax law has also changed other parts of your personal tax return (Form 1040), so it’s not easy to say how the loss of the unreimbursed business expense deduction might affect your tax bill. 

Telecommuting and State Taxes

State income taxes may differ from federal taxes in how the states tax telecommuting employees, and how they consider employee income and deductions. This includes the home office deduction.

According to Gail Rosen, the general rule is that a telecommuting employee pays taxes in the state where they perform their work. For instance, if an employee lives and works out of their home in New Jersey and works for a company in New York, the company should register their business in New Jersey and the employee’s W2 should reflect taxes withheld from their home state.

Disclaimer: The information in this article is intended to be a general overview, not tax or legal advice. Get help from your tax professional to prepare your federal and state income tax returns as a telecommuter.

Article Sources

  1. Workplace Analytics. "Telecommuting Trend Data," Accessed Oct. 28, 2019.

  2. Internal Revenue Service. "2018 Publication 529 Miscellaneous Deductions," Page 1. Accessed Oct. 28, 2019.

  3. Rosen, 2019.

  4. Internal Revenue Service. "Unreimbursed Employee Expenses," Pages 2-3. Accessed Oct. 28, 2019.

  5. Internal Revenue Service. "Deductions for Unreimbursed Employee Expenses," Page 2. Accessed Oct. 28, 2019.

  6. U.S. Department of Health and Human Services. "What's the Difference Between an Independent Contractor and an Employee?" Accessed Oct. 28, 2019.

  7. Internal Revenue Service. "Independent Contractor (Self-Employed) or Employee?" Accessed Oct. 28, 2019.

  8. Internal Revenue Service. "Definition of Adjusted Gross Income," Accessed Oct. 28, 2019.

  9. Tax Policy Center. "Q. How do state and local individual income taxes work?" Accessed Oct. 28, 2019.