If you are working from home for the first time in 2020, you may be wondering if your home office is tax deductible. The bad news? If you’re working from home for an employer, you normally can’t deduct your home office expenses.
Here’s a quick look at the basic requirements to be able to deduct your home office expenses, along with some suggestions for how to qualify for the deduction if you’re currently working for your company as an employee.
The basics
There are two requirements for having a tax-deductible home office:
- Your home office is only used for business purposes. Your home office must be used exclusively for operating your business. It can’t double as the family media center or living room. To meet this requirement, set up your office in a separate area of your house. Then if you get audited by the IRS, there is no doubt that your office is used exclusively for business purposes.
- Your home office is your primary place of business. You need to demonstrate that your home office is the primary place you conduct your business. The IRS has clarified that you can meet clients and conduct meetings at separate office locations, but your home office must be the only location where your administrative work is completed. So, if you meet with clients or work on any part of your business away from your home office, keep a journal of each specific activity undertaken and describe how it doesn’t violate the primary place-of-business rule.
Looking at these two criteria, everyone that is now required to work from home probably meets both qualifications. If you’re a W-2 employee, however, you can’t deduct your home office expenses on your tax return.
Solving the problem
Here are three options for solving your problem of being a W-2 employee and qualifying to deduct your home office expenses on your tax return.
- Become an independent contractor. The easiest way to deduct your home office expenses is by switching from being an employee to an independent contractor. With a number of firms cutting pay and hours due to the pandemic, it may be worth exploring. There’s a big warning label if you go this route, however. You will need to account for lost benefits, such as health insurance, and the additional cost of self-employment taxes. If you can meet the IRS requirements for becoming an independent contractor, it may be worth doing the math and considering all the deductions your home office may make available to you.
- Start a side business. If becoming an independent contractor for your current employer isn’t an option, consider starting a side business. You can deduct all business-related expenses on your tax return, including your home office expenses. If you go this route, ensure your home office is in a different location in your home than your other work space.
- Consider your entire household. Even if you don’t qualify for the home office deduction, maybe someone else living in your home does qualify. So, look into your options to see if a family member can take advantage of the home office deduction.
What if none of these options for deducting home office expenses are feasible for you? While you won’t be able to deduct your home office expenses on your tax return, you may still be able to end up financially ahead with the help of your employer.
Get reimbursed by your company
There’s no question you are picking up some of the expense of your home office with added electrical, heating, telephone, internet, and other expenses. One way companies are solving this is by allowing employees to submit valid expense reports to cover some of these extra costs. They do this by setting up an accountable plan. With financial pressures on businesses, this might be a tough subject to broach, but if the system is already in place you may be able to find a way to get some of your home office expense reimbursed.
So if you’re stuck working as a W-2 employee, look into whether your employer offers reimbursement for home office expenses.
Figuring out how to properly deduct your home office or get reimbursed by your employer can be a lot more complicated than it appears. If you need help, contact your financial advisor.
Whether you are hiring for the first time, filling an open position, or conducting annual performance reviews, finding a salary range that attracts and retains valued employees can be a difficult task. Here are some suggestions to help make the process a bit easier for you and your company:
- Know what your business can afford. Like any business expense, you need to know how it will affect your budget and cash flow. Make a twelve-month profitability and cash forecast and then plug in the high end of the annual salary range you are considering to see if it’s something your business can absorb. After all, the greatest employee in the world can’t help you if you don’t have the money to pay them. Don’t forget to account for increases in benefit costs, especially the escalating cost to provide healthcare. Once you establish a budget, you can allocate your spending plan to your payroll.
- Understand the laws. In general, the federal government sets the minimum requirements (minimum wage of $7.25 per hour, overtime rules and record keeping requirements). States and localities often add their own set of rules. For example, the state of Illinois, Cook County and the city of Chicago all have different minimum wage requirements. If you are located in Chicago you need to adhere to the highest rate. So research all payroll rules that apply to your location at the beginning of the process. When reviewing the rules, don’t forget that different rules often apply depending on the number of employees in your business.
- Review and update job descriptions. Take some time to review key jobs and update them as appropriate. With new positions, note the exact tasks and responsibilities you envision for the role. Then, think about the type of person that will succeed performing these responsibilities. Once you have a clear picture of who you are looking for, you can begin to build a detailed job description and narrow in on a specific salary range.
- Establish value ranges and apply them. Value is key when determining the perfect salary amount. Define the range of value for the position and then apply that valuation to the current person’s performance within the defined pay range. Use websites and recruiters to establish the correct range of pay, then apply experience and employee performance to obtain a potential new salary amount. Remember, size of company, location and competitiveness of the job market are all factors to consider.
- Factor in company benefits. A strong suite of employee benefits is a powerful tool to couple with a competitive salary. Don’t be afraid to communicate their value to prospective and current employees (they help with retention, too!). According to Glassdoor, health and dental insurance are the most important, but flexibility is close behind – over 80 percent of job seekers take flexible hours, vacation time and work-from-home options into consideration before accepting a position.
Finding the right salary can be tricky, but with some preparation and research, you can find the balance that satisfies the needs of your business and your employees.
Performance review meetings can bring stress to both sides of the table. But it doesn’t have to be that way. With the right planning by supervisors, the meeting can be a productive, stress-free event. Review these five steps before you review your next employee:
#1: Keep a performance log for every employee. How many times have you sat down to write a review and you can only remember what the person has done in the last few weeks or the last month? Or maybe you allow one single incident, either good or bad, to color your assessment. That’s why the best way to prepare is to take notes throughout the year. This can be as simple as notes on paper or in a Word document.
A few key points about performance logs: Include notes on both positive and negative work habits, avoid making references to protected characteristics, like race, age or gender, and don’t make assumptions about the reasons for a behavior or work habit — just stick to the facts, and assume that the notes could someday be read in court — because they could.
#2: Be aware of employees’ main concerns. Employees are understandably anxious about reviews. Does the employee know the expectations that he’ll be evaluated on? And were those expectations explained in advance? Will there be any surprises? Have you been giving the employee feedback throughout the year? Will the manager listen to what the employee has to say? And how does this review affect the employee’s pay? Be prepared for the employee’s questions and concerns, and you’ll be better prepared to handle them.
#3: On review day, create the right atmosphere. Your goal is to help the employee feel at ease. So hold the review in a private, neutral environment, such as a small conference room. You want a setting that supports discussion and cooperation, not confrontation. Sit next to the employee if possible, not across the table or across the desk. Schedule the time in advance with the employee’s input. Avoid meeting during a busy or stressful time for the person. And don’t squeeze it in between meetings or before a lunch. Finally, eliminate all interruptions and focus solely on that review.
#4: Cite specific examples of good and bad work. Stay away from broad generalizations about the employee’s work. Specifics will help you point out exactly what the employee needs to do to improve. For example, you don’t want to tell an employee, “You didn’t get your work done on time.” Instead, say something like, “Over the past six months, you’ve submitted six of your nine customer reports at least three days late.” Those specifics will really help the employee understand — and help your review stand up in court if it ever becomes an issue.
#5: Remember the ABCs of giving feedback.
A – Accurate: Offer objective, concrete examples backed by your performance log notes. You want to avoid words like “always” or “never.” Those are exaggerations that don’t usually reflect the realistic frequency of the way employees behave.
B – Business-oriented: Focus on the business reasons for the corrective comments. Stay away from any critiques about the employee’s personality or behavior.
C – Consistent: Remember to provide regular feedback throughout the year. Don’t dump it on the employee all at once during performance review time. It’s not fair to the employee and it’s not fair to you. Consistency is the key to improving performance.