Tax Benefits Give Added Incentives to Telecommuting
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
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
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 a 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, stationary, 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.