If you’re thinking about setting up employees as telecommuters, you’re not alone. Businesses ranging from large multi-nationals to small shops know that telecommuting not only can improve worker morale and performance, it can also save you and your employees money. What’s not to like about zero commuting costs and no office rent? You can also sell the benefits of telecommuting by alerting employees to some significant tax breaks.
Your federal tax responsibility
As the employer, your federal tax responsibilities will not change because one or all of your employees telecommute. They are still your employees even though they are not working in one central location, or multiple locations, owned and operated by you. You’ll withhold federal payroll and income taxes from their paychecks just as before. Some states and local jurisdictions, however, are trying to capitalize on the telecommuting trend by demanding withholding taxes based on the location of the telecommuter rather than that of a business’s regular office. Check with our office to see if this development applies to you.
Tax savings for employees
Telecommuting can open the door to some tax savings for your employees. However, and this is very important, the IRS looks very carefully for abuses, especially inflated home office deductions. You’ll want to spell things out very clearly when you set up an employee in a home office.
The home office must meet some tough IRS tests to qualify for the deduction. It must be used for the convenience of the employer and used regularly — and exclusively — as a principal place of business or a place where the taxpayer meets or deals with patients, clients or customers. Additionally, the employee must not rent any part of his or her home to the employer.
If you decide that an employee, or all your employees, should telecommute, your decision satisfies the “at the convenience of the employer” test. However, if an employee asks you if he or she can work from home, that request likely would not satisfy the test. An employee’s preference to work from home would not meet the IRS’s criteria.
Telecommuters who work exclusively from home should not have difficulty satisfying the “principal place of business” test. Their home office is where they work for you 100 percent of the time. However, taking depreciation deductions on a home office may not provide significant tax savings since those deductions reduce your tax basis in your home and therefore raise the amount of gain potentially taxable on its eventual sale. The $250,000 exclusion of taxable gain from the sale of a principal residence ($500,000 in the case of a joint return) may not be used to shelter any gain attributable to the business use of your residence. That may point to foregoing the home office deduction even if the employee may be entitled to it.
Your employee may not work from home all the time. For example, he or she may work at home three out of five days. If you’re thinking about this type of telecommuting arrangement, contact our office for more details. We’ll help you and your employees avoid any potential mishaps with the IRS.
Home office supplies
A home office needs supplies just like in the employer’s workplace. Items you supply, such as furniture, computers, scanners, fax machines, stationery, telephones, are deductible by you as the employer. They get the same tax treatment just as if you provided them in your workplace. This is regardless of whether a portion of the home itself qualifies for the home office deduction.
You may want to reimburse your telecommuters for utility charges, telephone calls, and similar expenses. Generally, these amounts will not be considered income to the employee. They could also be treated as tax-free working condition fringe benefits.
Just like the rules for deducting a home office, deductions for supplies can get complicated. Again, let us help you put together a telecommuting plan that not only maximizes tax savings for you and your employees but, most importantly, does not raise any red flags for the IRS.
Transportation costs from a home office to another place of business may be either a deductible transportation expense or a nondeductible commuting expense. It depends on which location is the individual’s principal place of business. This area is fraught with potential traps. The IRS and the courts have made some very technical and fine distinctions. Our office can help you understand them and set up a transportation policy that meets your needs.
We hope you found this article about “Tax Telecommuting” helpful. If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page or website www.GROCO.com.
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Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com. GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.
Alan L. Olsen, CPA, Wikipedia Bio
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