As millions of taxpayers prepare to file their 2020 taxes, a question that many telecommuting employees, independent contractors, and freelancers are wondering is: which of my remote work expenses can I write off on my taxes, and how much? Here’s what you need to know about taxes working from home.
Taxes Working From Home
The answer varies widely, depending on your employment classification, expenses incurred during the pandemic, whether your employer reimbursed you for remote work-related expenses, and which state you live in. To help you understand what your tax situation might look like this year, here are three of the most important things to know before filing your 2020 taxes:
Employees vs. Independent Contractors
The Tax Cuts and Jobs Act (TCJA) of 2017 increased the standard deduction to $12,000 for individuals and $24,000 for married couples, but it also eliminated many deduction opportunities for employees with unreimbursed business expenses. The law’s provisions were set for 2018 to 2025, so unless the current Congress makes adjustments to the TCJA, employees will not be able to deduct expenses incurred while working remotely, such as internet bills, electricity, software, office equipment, and the like.
Fortunately, independent contractors may deduct business expenses incurred from telecommuting work, including the self-employed health insurance deduction and other deductions relating to medical and dental bills. For more information on types of deductions available to independent contractors, skip to the section on “What Can Contractors Deduct?” below.
Employer Reimbursements for Employees
If you’re an employee working from home, you’re not entirely out of luck. While you won’t be able to deduct most of your remote work-related expenses on your taxes for 2020, you could ask your employer to reimburse you for these costs.
This is a win-win situation because companies have much more flexibility when it comes to deducting office expenses – including the costs of reimbursing employees for their office equipment, Internet and software – and a direct reimbursement would likely be preferable for employees in lieu of a modest tax deduction (which would require itemizing all of your expenses anyway; a huge challenge that may not pay off compared to simply taking the standard deduction).
Notably, employers can provide tax-free reimbursements for employees’ at-home office expenses by declaring them as qualified disaster relief payments. In a nutshell, Covid-19 has been classified as a national emergency, which triggers the IRS Sec. 139 that allows employers to pay employees back for expenses such as office chairs, desks, computers, printers, software programs, Internet, and phone services, and more.
What Can Contractors Deduct?
Although independent contractors are required to foot the bill for the entirety of their FICA taxes, there are many tax advantages afforded to contractors, including:
- Qualified business income deduction (deduct up to 20% of your business income, even if you’re a sole proprietor)
- Home office deduction (including mortgage interest, insurance, utilities, maintenance, depreciation and rent for a designated space in your home where you work)
- Internet, phone bills and software programs used for your job/business
- Meals for business meetings, conferences and/or entertaining a client (the Consolidated Appropriations Act of 2021 amended the TCJA to allow for 100% of qualifying business meals to be deducted through the end of 2022)
- Some business-related travel expenses
- Business-related transportation (car mileage, gas, insurance, depreciation)
- Advertising and subscriptions directly related to your work
Employees are understandably disappointed by the lack of tax deductions or credits available to them in wake of our giant societal shift to at-home work over the past year, but they’re still remains the possibility for your employer to reimburse you for work-related expenses under the IRS’s qualified disaster relief payment clause.
Meanwhile, independent contractors and freelancers will be glad to know that many expenses you were able to deduct in prior years continue into 2020 and beyond. Similar to the increased tax deduction allotment for meals under the Consolidated Appropriations Act of 2021, there’s a chance that Congress may pass additional legislation expanding tax deduction and credit opportunities for employees and independent contractors alike.
Until (and if) that happens, all remote workers – employee, independent contractor or otherwise – should focus on maintaining an organized recordkeeping system to keep track of receipts, business meeting-related expenses, and anything else you needed to pay for in order to complete your work from home since the start of the pandemic.