The last thing you probably want to think about right now is filing your taxes. Yet, if you plan early and keep excellent records, tax time can be a bit more bearable. Individuals working from home have the potential to save a lot on taxes.
So many people miss out on the tax savings they deserve.
We want to show you how to make the most of your allowable tax deductions and provide you with a handy tax reference to get you started on the right track.
You can refer back to this list and take it with you into your tax appointments.
Do You Work for Yourself or Do You Work for Others?
To start, let’s find out what camp you’re in. Are you an entrepreneur? Do you work for an employer? Are you a part of a partnership? Are you a freelancer? There are different tax opportunities for each of these groups. If you work for yourself, you have the potential to save on your taxes while working from home.
Today we’ll outline a few of the different tax deductions you may qualify for, depending upon your tax status.
Contents: What You Will Find in This Reference Guide
- A Word About Tax Professionals
- The Standard Deduction vs. Itemized Deductions
- General Tax Deductions for Everyone
- Employees and Job-Related Tax Deductions
- Calculating Home Office Deductions for Entrepreneurs
- Freelance and Contracting
- Sole Proprietors and Single-Member LLCs
- Small Corporations and Partnerships
- Final Considerations
A Word About Tax Professionals
Not all tax preparers are created equal. When you go to file your taxes you want to find a tax person that has experience with small business deductions, is an enrolled agent, and is a certified public accountant (CPA).
To save the most money on your taxes, find a tax preparer that is very familiar with filing returns for people working from home.
On this note, the data in this reference aid is for informational purposes only. Always seek the advice of a professional tax person.
The Standard Deduction Versus Itemized Deductions
We all want to save on our taxes while working from home. Yet we must determine if attempting to itemize our deductions is worthwhile. First and foremost, you will need to have expenses that go over the standard deduction. Only then can you itemize your deductions.
The Standard Deduction
Head of Household: $18,650
Married Couples Filing Jointly: $24,800
General Tax Deductions for Everyone
Regardless of your filing status, you may still qualify for itemized tax deductions. This is great news for anyone wanting to save money on their taxes while working from home.
Items You May Qualify for:
- Medical Insurance Expenses
- Dental/Orthodontics Premiums
- Medical Insurance Premiums
- Vision Insurance Premiums
- Specialty: Acupuncturists and Chiropractors
- Medical Equipment & Supplies
- Wheel Chairs
- Walking Devices
- Mileage To and From Providers
- House Mortgage Interest
- Interest Premiums
- Property Taxes
- Student Loan Interest – If you are paying interest on your student loans, you may be able to write off up to $2,500.
- American Opportunity Tax Credit
- Lifetime Learning Credits
Charity & Contributions
- Donations to Charitable Organizations
- Tithes & Offerings
- Clothing & Household Donations
- Examples: Salvation Army and Goodwill
- Donations up to $300 That Are not Itemized
Children and Dependents
- Child and Dependent Care Credit
- Nanny Expenses
- Child Tax Credit
- Adoption Credit
- Earned Income Tax Credit
Employees and Job-Related Tax Deductions
Unfortunately, as an employee, you no longer qualify for home office related tax deductions. This changed back in 2018 with the Tax Cuts and Jobs Act.
“The home office deduction is available to qualifying self-employed taxpayers, independent contractors and those working in the gig economy. However, the Tax Cuts and Jobs Act suspended the business use of home deduction from 2018 through 2025 for employees. Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home,” per the IRS.
However, there are a few perks you can expect to receive from your employer.
- Equipment Reimbursements and Stipends
- Work-Related Travel
- Federal Insurance Contributions Act (FICA) – You only have to pay half of the 15.3% that goes to Social Security and the 2.9% that goes to Medicare.
- Substantially Discounted Health Insurance
- You Can Utilize a Flexible Spending Account
Unfortunately for employees, work-related items cannot be written off. However, even as an employee, you may be able to deduct other expenses in your life.
Talk with your employer about stipends or reimbursements that you may qualify for.
Taxation from State to State
If you work in more than one state or work in one state but are employed in another state, you may have to pay income tax in both states.
- Find out which state your employer is taking withholding from.
- File in the state that you work first.
- Get a tax credit for the income that was taxed.
- Apply that tax credit to the tax due in the state you live in.
Be sure to bring up this issue with your tax preparer and make sure they apply this tax credit, if applicable to your situation.
Calculating Home Office Deductions for Entrepreneurs
There are two different ways to determine your home office deductions. The easiest and most carefree way is called the simplified method. With this method, the likelihood of getting audited is very low. With the regular method, things get a little more complex.
How the Simplified Method Works:
You basically get $5 per square foot, but not to exceed 300 square feet. In other words, the deduction cannot exceed $1,500. Unfortunately, depreciation is not factored into this.
How the Regular Method Works:
If you have more expenses and a larger home you may want to take advantage of the regular method to increase your deduction. You will have to calculate every detail and determine what percentage of your home that is used to run your business. From there, you may get to take that percentage as a deduction.
Talk with your tax advisor about how to best calculate your home office deduction and which method is best for you.
Freelance and Contracting
Most freelancers are not getting the full amount of deductions allowed.
As a freelancer or contractor, you are required to pay taxes if you have a freelance income greater than $400 per year.
As a rule, financial experts recommend that you put aside at least 25% – 30% of your taxable earnings for when you file taxes.
For those who make larger incomes, you may be required to file quarterly. In fact, if you expect to pay over $1,000 in taxes per year doing freelance work, you will be required to pay your taxes quarterly.
Self-Employment Tax is 18.2% of Your Gross Income!
As a freelancer, you are required to pay the full amount of self-employment tax. This is because 15.3% goes to Social Security and 2.9% goes to Medicare. Since you are in the role of both the “employer” and the “employee” you have to pay the full amount. Your income tax is then calculated after the self-employment tax and any other deductions you may have.
“Ordinary and Necessary” Items You May Qualify to Deduct:
- Home Office
- Business Insurance
- Business Related Interest
- Credit Cards
- Business-Related Mileage
- Vehicle Expenses
- Marketing and Advertising
- Ad Campaigns
- Business cards
- Flyers, Banners, and Mailings
- Retirement Accounts
- Professional Development & Education
- Travel & Hotel Costs
- Client Meetings and Meals
- Office Supplies and Equipment
- Internet and Phone
- Computer Hardware and Software
- Memberships and Trade Associations
- Business Website Setup and Maintenance
- The Costs of Incorporation
- Unpaid Invoices
- Transaction Fees
- Contract Labor
- Private Health Insurance Premiums
- A Percentage of Utilities and Mortgage Interest
Remember, be sure to keep all of your expense receipts!
Sole Proprietors and Single-Member LLCs
As a sole proprietor, single-member LLC, or single-member S Corporation, you will fill likely fill out Form 1040, or Form 1120S. Please Note: If you have more than one individual in your LLC, you will need to file as a partnership. See the next section for information on partnerships.
“Ordinary and Necessary” Items You May Qualify for:
- Home Office
- Company Car and Truck Expenses
- Repair Costs
- Commissions and Fees
- Contract Labor
- Expense Deductions
- Employee Benefit Programs
- Employee Wages
- Business Insurance
- Interest on Loans
- Legal and Professional Services
- Mileage and Gas Expenditures
- Driving to Meetings with Clients
- Meetings With Other Professionals
- Meetings With Service Providers
- Office Expenses, Materials, and Supplies
- Paper, Folders, Paper clips, Pens, etc.
- Printer Equipment
- Furniture: File Cabinets, Chairs, Desks, Tables, etc.
- Pension and Profit-Sharing Plans
- Rent or Lease
- Car Rentals
- Storefront or Other Business Rentals
- Building/Office Rental
- Repairs and Maintenance
- Business Travel and Meals
- Business Filing and Registering Costs
- Taxes and Licenses
Small Corporations and Partnerships
At a glance: If you have gone into business with other professionals and your company is registered as a partnership or S-Corp, you may qualify for additional deductions.
“Ordinary and Necessary” Deductions You May Qualify for:
- Compensation of Officers (S Corp)
- Paid Salaries and Wages
- Guaranteed Payments (Partners)
- Repairs and maintenance
- Bad debts
- Home Office
- Taxes and Licenses
- Advertising and Marketing
- Retirement Plans
- Employee benefit programs
- Ordinary Business Income Loss
Sometimes you have to think outside of the box to realize the full potential of the tax breaks you are entitled to.
Also, consider making major purchases all in one year, to add to the size of your overall deductions, so that you can get a larger write-off. Strategize, plan, and work with your tax professional often. In this way, they can work with you and show you how all the way you can maximize your deductions.
The most important thing to remember is to keep your receipts and records. It is extremely important to keep immaculate records for at least seven years or even longer.