When the tax reform bill became law at the end of 2017, employees lost the ability to deduct expenses related to maintaining a home office for tax years 2018-2025. For much of 2020, however, many employees have maintained home offices and are spending a great deal more money on work from home expenses.
“Employees are not claiming classic travel and entertainment (T&E) expenses but are claiming new types of work from home-related expenses,” the survey states. “These include one-off items such as office chairs, external monitors, and desks; subscription costs, such as internet usage; and COVID-19-specific items like hand-sanitizer and face masks.” (The report surveyed 1,000 participants from organizations with 250 or more employees about how work from home has changed expense claims.)
Employees working from home may have lost a tax deduction, but as an employer you have several options that will ease the expense for workers while also benefiting your company.
1. Purchase equipment for employees.
“The employer could purchase the equipment, deduct the cost and send the equipment home for employee use,” says Toby Mathis, founding partner of Anderson Law Group, a tax law firm.
This is the tack that Neal Taparia takes with his card game company Solitaired.
“We have a policy to buy equipment for our employees and reimburse them,” he says. “For example, we bought all our employees an extra monitor for their home office, and we also gave them a $250 stipend to purchase anything for their home office that would be reimbursable.”
2. Use an accountable plan.
You can reimburse employees for certain home office expenses through an accountable plan. Such a plan allows employees to receive tax-free money for expenses while the employer deducts the expense, saving on payroll taxes.
“If all of the following rules are met, reimbursement for expenses can be excluded from employee W-2 wages,” says Mathis.
Those rules are:
- Expenses must have a business connection.
- Employees must substantiate the expense on a timely basis (usually with a receipt).
- Employees must return any excess allowance they are unable to substantiate to their employer.
According to Steven Weil, president and tax manager of the RMS Accounting, covered expenses include internet access, computers, software, office supplies and office furniture. The reimbursement must be made within 60 days to the employee.
If a company has an employee working from home in a state that has not issued guidance, there may be additional income tax filing requirements. It’s important to stay abreast of this and all tax ramifications of work from home.
—Yesenia Cardona, director, EisnerAmper
3. Employ qualified disaster relief.
Another option is to reimburse employees for expenses incurred by designating the payments as qualified disaster relief payments.
“There is a provision under Section 139 of the U.S. Internal Revenue Code that allows companies to make tax-free payments to their employees for the reimbursement of reasonable and necessary expenses incurred as a result of a federally declared disaster,” says Yesenia Cardona, director at the accounting firm EisnerAmper.
“Since COVID-19 was declared a disaster, companies can reimburse their employees for the costs of setting up their home offices,” she says. “These payments are tax-free to the employees, and employers can take a tax deduction for such payments.”
According to Bill Hughes, COO of the CPA firm Business Allies Group, disaster relief covers the following expenses:
- unreimbursed medical expenses
- work-from-home expenses (Internet, office supplies, computer, furniture)
- dependent-care expenses, including childcare and additional educational expenses related to remote learning
- additional transportation expenses
4. Consider home office deductions.
According to Mathis, an employer may reimburse any employee expenses related to working from home, including partial reimbursement of the employee’s expenses related to a home office.
“The space must meet IRS requirements as a home office—regular and exclusive use of the space for work,” he says.
Mathis gives an example of how this works. “An employee works from her apartment and all of her expenses—rent and utilities—equal $1,500 per month, and the work area is 10 percent of the space,” he says. “As the employer, you can reimburse the employee $150 per month. You deduct the expense, and the employee doesn’t pay taxes on the money. You need an accountable plan to reimburse the expense, and the employee must provide receipts within 90 days.”
5. Pay additional funds.
“Employers may also choose to give their employees a specific dollar allowance through a nonaccountable plan,” says Cardona. “In this scenario, employees receive an allowance for home office expenses but don’t have to substantiate the expenses to their employer.
"The amount of the allowance paid is included in employee W-2 wages as income at the end of the year," she continues. "This gives the employer a tax deduction for the allowance paid.”
6. Consider the differences across states.
The tax ramifications of employees working from home will depend on where your company is located.
“When the employer is compelling its employee to work from home, or if the employee is forced to work from home because of the pandemic, there are state laws to pay attention to,” says Mathis. “In California, Illinois, Iowa, Massachusetts, Montana, New Hampshire, New York, Pennsylvania and the District of Columbia, employers will likely have to cover all expenses necessary for the employee to work from home, including equipment, cell phone and internet.”
If you have employees working out of state from your corporate offices, this may also affect taxes.
“When a company has employees working in a state other than the state where the business is located, this usually creates nexus in that state,” says Cardona. “Some states have announced they won’t consider employees working from home solely due to COVID-19 as physically working in that state, but some states have not issued any guidance on the matter.
“If a company has an employee working from home in a state that has not issued guidance, there may be additional income tax filing requirements,” she says. “It’s important to stay abreast of this and all tax ramifications of work from home.”
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