Many clients worked from Home in 2020 and asked us whether they can deduct the expenses on their tax return. If you’re working from home for an employer, you normally can’t deduct your home office expenses.
There are two requirements for having a tax-deductible home office:
- Your home office is only used for business purposes.
- Your home office must be used exclusively for operating your business. To meet this requirement, set up your office in a separate area of your house. Then if you get audited by the IRS, there is no doubt that your office is used exclusively for business purposes.
- Your home office is your primary place of business.
- You need to demonstrate that your home office is the primary place you conduct your business. The IRS has clarified that you can meet clients and conduct meetings at separate office locations, but your home office must be the only location where your administrative work is completed. So if you meet with clients or work on any part of your business away from your home office, keep a journal of each specific activity undertaken and describe how it doesn’t violate the primary place-of-business rule.
Looking at these two criteria, everyone that is now required to work from home probably meets both qualifications. If you’re a W-2 employee, however, you can’t deduct your home office expenses on your tax return.
How employee can get deduction on their tax return
Here are three options for solving your problem of being a W-2 employee and qualifying to deduct your home office expenses on your tax return .
1.Become an independent contractor. The easiest way to deduct your home office expenses is by switching from being an employee to an independent contractor. With a number of firms cutting pay and hours due to the pandemic, it may be worth exploring. There’s a big warning label if you go this route, however. You will need to account for lost benefits, such as health insurance, and the additional cost of self-employment taxes. If you can meet the IRS requirements for becoming an independent contractor, it may be worth doing the math and considering all the deductions your home office may make available to you.
2.Start a side business. If becoming an independent contractor for your current employer isn’t an option, consider starting a side business. You can deduct all business-related expenses on your tax return, including your home office expenses. If you go this route, ensure your home office is in a different location in your home than your other work space.
3. Consider your entire household. Even if you don’t qualify for the home office deduction, maybe someone else living in your home does qualify. So look into your options to see if a family member can take advantage of the home office deduction.
Get reimbursed by your company
There’s no question you are picking up some of the expense of your home office with added electrical, heating, telephone, internet, and other expenses. Some companies have set up an accountable plan. You may be able to find a way to get some of your home office expense reimbursed. So if you’re stuck working as a W-2 employee, look into whether your employer offers reimbursement for home office expenses.
Contact CINDIE for more information
200 Centennial Avenue, Suite 106, Piscataway, NJ 08854
Phone: (732) 896-0272
Fax: (732) 676-1661
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