How Does Working From Home Affect Taxes?

Millions of Americans started working from home in 2020 and 2021 due to the coronavirus and the changing nature of the landscape of work.

But are there any tax benefits to working from home?

Well, a lot depends on whether you’re employed or self-employed. Let’s take a quick look.

Working From Home: Employees And Tax

Working From Home: Employees And Tax

You are an employee, under law, if you get paid for your work and the person paying you takes your tax, Medicare and Social Security payments out of your wages before you receive them. 

And until fairly recently, employees could get a wide-range of tax deductions for their working expenses.

Sadly, The Tax Cuts and Jobs Act of 2017, put an end to that. 

Now, you can only deduct itemized deductions if they exceed the standard deduction (that is $12,400 for single tax filers and $18,400 for household filers and $24,800 for married couples that file joint returns – these numbers are correct for 2021). 

So, in short, you’re not likely to see any tax breaks when working from home as an employee.

Though, don’t see this as a huge downside – you’re still not paying to commute, you don’t need to spend a fortune on work clothes, etc. You will also be able to create a better work-life balance. 

So, employees who work from home can still save money – though we would note, in some places, they are considering introducing an extra “work from home” tax to reduce those savings, so get them while you can.

There is an exception to this rule though. Teachers may deduct $250 for “unreimbursed expenses” for working from home (and yes, if you’re married and file a joint return this goes up to $500 if you’re both teachers).  

You will need to be able to show you are a teacher (or instructor, principal, classroom aide or counselor) and that you work a minimum of 900 hours a year and work in a school that delivers secondary or elementary education. 

You must also be able to provide receipts for “qualifying expenses” – computer equipment, software, courses, books, etc. 

Working From Home: The Self-Employed And Tax

home office

A self-employed person, according to the IRS, is someone who owns their own business – this can be a sole-trading enterprise or a limited company. 

If you fall into this category then the big tax deduction that you are entitled to as a home worker is for your home office.

However, you can’t get a nice tax deduction for slinging your laptop down on the kitchen table and working from there.

The rules require that you use an area in your home exclusively for business. So, that’s no to kitchen tables. No, to spare bedrooms that you also use as your writing area. No, to man caves that you also take photos in. And so on… 

Assuming you have such a dedicated area – there are two ways to get a deduction:

  1. The Simplified Method – this is very easy to do, you get $5 per square foot up to a maximum of 300 square feet. To get the most out of this allowance, you need to enlarge your office to as close to that 300 square feet as possible.
  2. The Regular Method – this gives you a deduction based on the overall expenses it takes to run your household factored down to the % square footage that the office takes up compared to the overall square footage. This method can give you more than $1,500 but it’s not simple to do and you will probably need an accountant to let you know what recipes you must provide and to do the paperwork for you at tax time. 

And, of course, the self-employed may also be able to deduct other expenses on their tax returns in a similar way to any other business expense. 

You’ll need to talk to an accountant to get a handle on these expenses. 

Final Thoughts On Taxes And Working From Home

While more people are working from home, sadly, there are no tax breaks that have been granted to employees in this post-Covid world.

In fact, it’s likely that in the future, some employees may have to pay more tax to work from home (though this has not, yet, been confirmed anywhere).

Self-employed people, on the other hand, can get a tax deduction for their home office. 

Don’t worry though there are plenty of good things about working from home – see our pros and cons list for remote working and check out these remote working podcasts to find out what they are.