Changes in Home Office Tax Deductions for Telecommuters
How tax law changes affect work-from-home deductions
If you work from home as an employee of a business, you’re among a growing group of millions of employees who telecommute.
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.
Changes to Work-From-Home Tax Deductions
According to C.P.A. Gail Rosen, before the 2018 tax reform bill, you could deduct employee business expenses—such as the home office expenses for employees who telecommute—as a miscellaneous itemized deduction on Schedule A. The new tax law eliminates miscellaneous itemized tax deductions 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 as tax deductions, including the home office deduction.
In addition to the home office deduction, other unreimbursed expenses that work-from-home employees can no longer deduct include:
- Fees for professional licensing
- Dues to professional societies
- Educator expenses
- Tools and supplies
- Business travel and meals expenses
Who Can Take the Home Office Deduction?
The home office deduction wasn't entirely eliminated. It is still in effect for self-employed individuals.
Some types of employees may also be eligible to take a home office deduction for unreimbursed employee expenses, including:
- Armed Forces reservists.
- Qualified performing artists.
- Fee-based 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.
- Necessary for carrying on your trade or being an employee.
- Ordinary and necessary.
Are You a Telecommuting Employee or a 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 tax withholding and a W-2 at tax time, 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:
- Behavioral: Does the company control or have the right to control what the worker does, when they work, and how the worker is doing their job?
- Financial: Does the company control of worker pay, reimburse expenses, and provide tools and supplies?
- Relationship: Do the company and worker have a written contract or employee benefits, and is 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. The net income (or loss) from your business is included with your other income on your tax return.
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, so how the loss of the unreimbursed business expense deduction might affect your tax bill will vary from person to person.
Telecommuting and State Taxes
State laws may differ from the federal tax law in how the states tax telecommuting employees, in addition to how they consider employee income and deductions. This includes the home office deduction.
In general, 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 W-2 should reflect taxes withheld from their home state.
If you are unsure which state to pay taxes in or which deductions you can take, your employer's HR department may be able to help. You can also work with a professional tax preparer to ensure that you follow all appropriate tax laws.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.