Tax deductions and expenses available to remote workers

Remote work offers ultimate flexibility, but did you know it can also bring tax savings? As a remote worker, you can take certain tax deductions for your business expenses. However, only certain types of people who work remotely are eligible for these tax deductions.

This article will guide you through what type of remote workers can claim eligible deductions and how to help you maximize your potential tax return.

Are there tax deductions for remote workers?

Since the 2018 tax reform, generally only self-employed people can claim tax deductions for remote work. That means remote employees can no longer claim tax deductions for their work from home. Instead, employees should ask for reimbursements from their employers.

There are exceptions to this law:

• People working in the performing arts, government officials, and people who are in the military reserve forces.

• Some states have their own laws that let employees take deductions for unreimbursed expenses on their state tax returns.

If you worked from home as an employee of a company during the tax year, you typically cannot claim home office expenses related to your work. If you were self-employed in some capacity, you could deduct home office expenses. That means you were working as both an employee and a self-employed individual with a side business. Deductions for your home office expenses must be related to your self-employed taxable income rather than income from your employee work.

Does working remotely make me an independent contractor?

The short answer is: no. Many people work remotely as employees of companies. That has become increasingly popular as a result of the pandemic as many employees enjoyed their remote working experience. In those cases, the workers are classified as remote employees instead of independent contractors.

An independent contractor is a self-employed individual who provides services and is not classified as an employee. Self-employed workers can claim tax deductions for business expenses and for working out of a home office. 

Employees who work side gigs in addition to their employee work may also qualify for certain deductions related to their self-employed work. 

5 remote work tax deductions

Only self-employed individuals can claim eligible deductions for business expenses. Because there are so many people working remotely, the Internal Revenue Service (IRS) has strict guidelines on who can claim deductions and what expenses they can claim deductions for. As such, keeping accurate records of any expenses you want to claim as a deduction is essential. 

Keep a written record or log book in case you have to show proof of your deductions. You should also keep payment records made for any tax-related spending. That may mean saving credit card statements, bank statements, checks, or itemized receipts. The digital records of these documents usually suffice. If paying in cash, make sure to get a receipt with who you paid the cash to, the payment date, and the amount.

Work from home tax deductions may include: business expenses, tools and utility expenses, business meals and travel expenses, and home-related expenses, including home office deductions.

1. Deductions for business expenses

Any expenses you deduct have to be directly related to your business. Common deductions are expenses that are typically allowed for office-based companies, including:

• Insurance

• Rent

• Utilities

• Internet

• Equipment (computers, software, office furniture)

• Repairs and maintenance

• Home depreciation

• Deductible mortgage interest

• Advertising and promotions

• Banking fees

• Depreciation for a home you own

2. Tools and utility expenses

Some self-employed business owners may purchase property and equipment for their business that can be claimed as an expense for the deduction. According to the IRS, to file claims regarding property, you must meet the following criteria:

• You must own the property, and it must be used to make money.

• You should be able to give an estimate of how long you can use the property to make money with it. 

• You must be able to use the property for more than one year. You cannot purchase and dispose of the property in the same year.

Self-employed workers can deduct up to $1,050,000 for qualified business equipment. Business equipment includes computers, printers, office furniture, and supplies like paper or ink. 

3. Business meals and travel expenses

You may deduct the business miles traveled on your tax return if you travel for business. Whether you take a long trip abroad or travel short distances in your city does not matter. You can claim the deduction in two ways: the actual expense incurred or the IRS standard mileage rate. 

If you use the standard mileage rate, keep a log of miles driven to separate personal and business use. In 2022, the rate has increased from 58.5 cents per mile to 62.5 cents per mile. It’s a good idea to check the mileage rates every year, as they typically change.

If you claim deductions for your car expenses, make sure to keep track of all your car-related expenses. They may include payments, registration, insurance, rent for parking, licenses, repairs and maintenance, and parking and toll fees. If you pay for other transportation fares, such as air, bus, or train, you may also include those as travel expenses. You can also deduct the costs for restaurant meals and entertainment as long as they are business expenses.  

4. License fees and expenses

Any educational expense is potentially tax-deductible. That means costs spent on taking online or college courses, buying professional development materials, and paying licensing fees can all be deductible. You may also include subscriptions to trade or professional publications and donations to business organizations. 

These are usually determined as necessary for self-employed business owners to continue to grow their businesses. You can deduct items you have purchased to improve your job or business. Remember to save receipts of materials and courses purchased in case you need them. 

5. Home office tax deductions

Working from home? You might be able to save money on taxes by claiming the home office deduction. If you rented a small office to work in, that rent would count as a business expense that lowers your taxable income. The home office deduction works the same way. 

Since part of your home is your workplace, you can deduct a portion of your home expenses on your tax return. This includes mortgage interest, property taxes, homeowners insurance, and even utilities. Because you're shouldering the office space costs that employers typically cover, the government offers a tax break to help offset the expenses of maintaining your home office.

Who qualifies for home office deductions?

Generally, independent contractors or self-employed workers who work from home can claim this deduction. If you have a side business on top of your regular job and you work from home for that side business, you can also claim part of your home office deduction.

What are the eligibility requirements for home office tax deductions?

The home office deduction is a great perk for self-employed workers. That said, there are a few key requirements to claim it: 

Regular and exclusive use

Your home office must be used exclusively and regularly for your self-employment for you to make home office deductions. The IRS is serious regarding what it means to use a space exclusively and regularly. The exclusive-use rule states that the space can only be used to conduct your self-employment business and nothing else. If you share your home office between your self-employed business and your job as an employee, you can’t claim the home office as a tax deduction.

You must use the portion of your house, apartment, condo, or similar living space for your business on a regular basis. That also includes structures on your property, such as a detached studio, barn, greenhouse, or garage. 

Principal place of business

Your home office must also be either the principal location of your business or where you regularly meet with customers or clients. If you have a space for your self-employment work that’s separate from your employee job, you can claim eligible expenses for your self-employment space as deductions. However, the expenses for your employee space cannot be claimed as deductions.

Can remote employees claim home office tax deductions? 

Remote employees who receive a salary or hourly wage can't typically claim this deduction, even if they work from home. In their case, a home office is a substitute for the office space an employer would provide. Since W-2 employees aren't paying for that office space, they can't deduct the cost of their home office.

However, there are a few exceptions for W-2 employees with special circumstances, such as state or local government officials, educators, and individuals with disabilities.

4 tips for claiming home office tax deduction

Here are a few things to keep in mind when it comes to claiming your home office tax deduction:

1. Determine the best deduction method yearly

The amount you can deduct for your home office depends on the size of your workspace compared to your home as a whole. Choosing the best method depends on your situation. What applies one year may not be the best option the next.

To calculate your home office business percentage, you compare the number of hours of operation to the total number of hours in the year. Divide the business hours by the total number of hours to get a percentage of available hours, then multiply that number by the percentage of your house used for business to get your business percentage.  

There are two methods for calculating your home-office deductions for business use: the standard method and the simplified method. Once you have an estimate of your business use percentage, you can calculate the deduction amount using both methods. The method that gives you a higher deduction is the one to go with. 

The Standard Method

The standard method, also known as the direct method, has no maximum deduction limit. To make home office deductions this way, you need to keep track of all your home office expenses, including costs related to repairs and maintenance. 

This standard method is a good choice if: 

• Your home office takes up a significant portion of your home: If your workspace is a large room or even a separate unit, then the percentage of your home used for business will be higher. This means a larger deduction under the standard method.

• You have high home-related expenses: If you pay a lot of mortgage interest, property taxes, or homeowners insurance, applying the business use percentage to these expenses can give you a bigger deduction. 

To calculate your home office tax deduction, divide the square footage of your home office by the square footage of your entire living space. This gives you the percentage of your home that is dedicated to your home office. You apply this percentage to your home expenses to determine what amount might be a business expense.

For example, suppose the office measures 150 square feet and the total area of the house is 1,500 square feet. To calculate your home office tax deduction, take 150 and divide it by 1,500 to get 10%. That means the business percentage is 10%.

If all the rooms in your home are about the same size, you may calculate your deductions using a more straightforward method. In that case, you divide the total number of rooms in the house with the number of rooms used for your business to get your business percentage.

The Simplified Method

This is a simpler method compared to the standard method to determine your home office deduction. You can claim as an expense $5 per square foot of your office, up to 300 square feet. To calculate the tax deduction, you take the total square footage of your office and multiply it by $5, for a maximum of $1,500 per year.

The simplified method might be a good fit if: 

• You have a small home office: If your workspace is in a small room or a desk tucked into the corner, then the total square footage is likely lower, and you’ll get a smaller deduction under the standard method. Here, the flat rate per square foot is more beneficial.

• You have low home-related expenses: If you have lower mortgage interest, property taxes, or homeowners insurance, the flat rate deduction might be comparable or even higher than what you’d get under the standard method.

If you choose to use the standard method and you own your house, you need to consider the depreciation of a portion of the house. You do not need to calculate this when using the simplified method. However, since the standard method has no maximum deduction limit, you may get a more significant deduction using the standard method.

Fortunately, you can switch between the standard and simplified methods every year. You may choose to switch methods without having to provide a reason. Before choosing one to file taxes, consider calculating both methods to determine the most significant deduction possible.

2. Keep detailed records of all relevant expenses

Be prepared to justify your deductions with documentation in case of an audit. It’s always good practice to keep detailed records of not only direct expenses but also the use of the home office space. All other yearly home-related expenses, like mortgage interest and property taxes, should also be documented. 

Keep copies of invoices or contracts that show business activity conducted from the home office. Additionally, consider keeping a log to document the hours you work from your home office each day. That way, you establish a consistent business use pattern for the space.

3. Maximize deductible expenses

Identify all the expenses that qualify as home office deductions. Beyond the basics of utilities and Wifi, expenses like home security systems and dedicated business phone lines are also deductible. 

You can also deduct a portion of home maintenance costs that directly benefit your workspace, such as repainting the walls or replacing a broken desk chair.

4. Stay updated on IRS guidelines

Tax laws are always changing, so it’s important to stay informed about any updates. Keeping track of tax code changes makes sure you are complying with the latest IRS regulations. 

Staying compliant not only reduces the risk of audits but also helps you get as much benefit out of this tax break as possible. 

Know your tax returns and filing options

You should consider two tax forms when making these deductions on your tax returns: Schedule C and Form 8829.

Schedule C is a short form you need to complete if taking the simplified method for your home office tax deduction. 

Form 8829 helps you determine what you can claim for your home office deductions. The form consists of four parts:

• Part 1: You calculate the part of your home used for business to get your business percentage. For most businesses, you calculate the square footage used exclusively for your business by the total square footage of your house. 

• Part 2: You list your total business income and your deductible expenses. The form takes you through how to reach your total allowable expenses for the business use of your home.

• Part 3: You calculate the depreciation of the business portion of your home. The form includes instructions on how to determine your allowable depreciation percentage. 

• Part 4: In this final section, you determine any expenses that can be carried over to the next tax year. 

Becoming familiar with eligible tax deductions and expenses can help you save and make better decisions for your business as a self-employed business owner. It would be wise to consult a tax professional to better understand your taxable income for your remote job. 

To save even more, think about long-term strategies for reducing taxes. That may entail setting up a defined benefit pension plan or paying yourself rent for using a building you own for business.

Remote simplifies tax deductions for remote workers

Remote is reimagining the future of work. Our team of experts has the experience and knowledge to help you more easily navigate and determine tax deductions and expenses available to remote workers. 

And this applies to not only the US — Remote simplifies tax deduction information globally so that you can take advantage of location-specific benefits. Access our toolkit for expert insights on landing the best remote opportunities.

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