The world as we know it is currently in a seismic shift. Many of us are learning to adjust to the new normal. As the coronavirus pandemic continues to spread across the country, the numbers clearly show that many people continue to work exclusively from home.
According to a report by the Federal Reserve Bank of Dallas, around 35.2% of the population and a staggering 71.7% of US workers were working from home in May, compared with just 8.2% in February.
While some are staying home for safety and convenience, others are required to stay at home by their employer or the state or local government. Many large companies offer the option to work from home until the end of the year. There is a lot to be deciphered on a personal or tax policy level.
In these confusing times, here are some practical tips on tax aspects of working from home
Understand the legalities of your employment situation
During these times, the boundaries between employees and freelancers overlap. Understand that just because you work from home you are not self-employed. If you receive a paycheck from an employer and that earnings are reported to you and the Internal Revenue Service on a W-2, you are clearly an employee.
Working from home isn't the only criteria to make you an independent contractor to earn a 1099. And while you can certainly get a Form W-2 and a Form 1099 in the same tax year, you shouldn't get a Form W-2 and a Form 1099 from the same employer for the same type of work.
Primarily due to the Tax Reduction and Jobs Act (TCJA) for the tax years 2018 to 2025, you as an employee cannot deduct any home office costs. In particular, there is no hardness exemption or coronavirus exemption. Indeed, the law highlights that employees who work from home will no longer be able to claim the home office deduction. The reason you work from home doesn't matter to the IRS. However, if you are self-employed, you can still deduct qualified home office expenses.
If you can't deduct the expenses, find out what to take from the office instead
Certain office equipment can help you improve your productivity. Therefore, ask your employer whether you can take them home with you. The TCJA rules apply to all non-reimbursed employee labor costs, not just your physical home office. If your employer does not reimburse you, anything you spend out of your pocket is not deductible for federal income tax purposes. However, if your employer has already spent the money to buy the office supplies or equipment for you, simply moving them into your home is a win-win for everyone.
Connect with a tax advisor
It's not just the home office deduction that creates confusion for those who work from home. Another major dilemma for employees who normally work in one office in one state but now live and work in another is additional tax filing complications.
There is currently no national standard for withholding, filing, and paying state income taxes for employees who work in more than one state or who work in one state and live in another. That means you may have tax requirements about where you normally work and where you live. It's just a lot less stressful to hire a professional. But one piece of advice here, you should still be aware of the ground rules in your state to ensure you don't get a terrible shock next April.
Keep logging in to these work items and review your With Holding
For tax reasons, keep a record to keep track of your daily work locations. In addition, keeping a log prevents you from falling into the habit of working seven days a week.
Also find out how much is held by your employer for the state you live (and now work) in, and whether that is enough to avoid a tax burden. If you normally only work from an office in another state, working from home can add to your home state's liability for 2020. However, there is a silver lining if your home state has a lower tax rate than the tax rate your office is in. Home for much of 2020 could actually save you taxes.
Pay attention to the security
It is advisable to protect remote locations using a virtual private network (VPN) to protect against cyber intruders. A VPN provides a secure, encrypted tunnel for the transmission of data over the Internet between a remote user and the corporate network and is critical to protecting and securing Internet connections.
Don't jump on the bandwagon just yet
The loss of the home office allowance for employees has many taxpayers wondering whether it makes sense to quit their day jobs and go into business for themselves. It's a purely personal choice, but the numbers still don't support that type of shift. What if you are really self-employed – that means you get a 1099 and not an aW-2. Then you would get the home office deduction on Federal Form 8829, Home Business Expenses, which is reported on your 1040 along with your Schedule C, Profit or Loss on Your Business
Create a comfortable home office area
It still makes sense to have practical and necessary expenses for your office space at work. The TCJA has not changed the home office cost rules for self-employed and independent contractors. These costs are deductible as long as they otherwise meet the deduction criteria for the home office. It is important that you create your workspace and make staff aware of your working hours and that they do not disturb you during this time. For the self-employed with a view to the home office deduction, it is mandatory to apply for a federal income tax deduction for a home office, so you have to use a certain area of your home exclusively for your trade or business.
Adjust working hours and make human connections whenever possible
Many people are working at the same time, even if it is from home. However, it is important to keep track of your working hours. Even if you work from home most of the year, it is still important to create opportunities to meet up with colleagues and acquaintances, even if only virtual. Keep an eye out for online seminars and webinars in your arena. Socializing is healthy, and you can learn a lot from colleagues who are going through the same thing. It is imperative to compare notes as we all study every day as we walk!