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Telecommuting Tax Issues

Tax rules and legal issues that affect telecommuters and their employers

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Employees who work from home enjoy greater work-life balance and other benefits, and there are many advantages of telecommuting for employers as well. But telecommuting also comes with some taxing issues, including murkiness about what items telecommuters can deduct, cross-border tax isues, and others. Here's a look at what telecommuters and their employers need to consider at tax time.

Home Office Tax Deduction for Telecommuters

The home office tax deduction can present significant savings, since it allows you to deduct a portion of the expenses you have for your entire home (e.g., mortgage interest or rent, utilities, etc.). To qualify for the deduction (in the U.S., at least), telecommuters have to meet the same requirements that self-employed independent contractors and business owners working from home do--plus an additional requirement. In addition to your home office being:

  • a separately identifiable space
  • used regularly and exclusively
  • as the principle place of business (or, possibly, where you meet clients)...

...Telecommuters also have to prove that their work-from-home arrangement is for the employer's convenience, for example, if the employer is a virtual company with dispersed teams and no office is provided to employees (or they hire you out of state). If you work from home for your convenience (to avoid a long commute, for example), the IRS wouldn't allow the deduction.

If you work from home as a employee and also run your own business from the same home office some of the time, your situation is even trickier and may require you to set up distinct workspaces.

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Other Telecommuting Expenses and Tax Deductions

What about other expenses used while working from home for your employer, like office supplies, telephone or Internet service, or furniture and computer equipment? Business owners and sole proprietors can deduct these items as business expenses on the IRS Schedule C, reducing their tax liability. Telecommuters can deduct the portions of these expenses that are used solely for working for the employer, but they have to be claimed as miscellaneous itemized deductions. Only the expenses that exceed 2% of your adjusted gross income actually count with the miscellaneous itemized deduction, so in many cases getting reimbursed for your job expenses by your employer will be more valuable.

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Working from Home for an Employer in Another State or Country

The tax issues surrounding cross-border telecommuting can be tricky and possibly detrimental to the progress of telework in general. In July 2010, a ruling by New Jersey's Tax Court required Maryland-based Telebright Corporation to file New Jersey corporation business tax returns solely because the company had one telecommuter working from NJ. If other states (and localities even) follow suit, the added expense and trouble of filing additional corporate tax returns might dissuade employers from hiring telecommuters in other states or allowing telework at all.

For telecommuters, there's also the issue of double taxation. Telecommuters who work from home part-time may be taxed by their home states--and also 100% by their employer's state (not just for the wages they earn when they are in their employer's offices), under a rule called "convenience of the employer". New York is one of the states that agressively applies this rule. The Telecommuter Tax Fairness Act (HR 260) was introduced 2009 to abolish this penalty, but as of this writing it's still pending in Congress.

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Tax Credits and Incentives for Telecommuting

On the plus side, there are sometimes incentives for employers to allow more telework and other types of flexible work. Some communities and government organizations, for example, offer credits to businesses that support telecommuting, often in the hopes of further reducing pollution and traffic.

For more information about taxes and telecommuting issues, see our Tax Rules and Telecommuting Articles Directory.

Disclaimer: I am not a tax professional, so it's important that you consult your financial adviser and IRS publications for specific questions about your taxes or other financial topics.

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