The Hidden Cost of Remote Work

By: James Flippin · February 06, 2023 · Reading Time: 3 minutes

Lifestyle Perks and Taxes

The pandemic inspired a shift away from W-2 jobs and toward remote and freelance work. The change has been significant: the US Census reported the number of people working from home tripled between 2019 and 2021.

Some joined the gig economy due to its promise of flexibility and agency. Others moved further from their employer for affordability and lifestyle improvements. But there’s one underreported tradeoff to leaving the office or W-2s behind: a more complicated process come tax time.

Deduction Pitfalls

While withholding your own taxes is one responsibility of non-W-2 workers, not all of these complications involve spending money. In fact, contractors and freelancers are eligible to deduct a number of work-related expenses, which can ultimately help save on taxes.

However, when it comes to the tax code, it’s important to note potential pitfalls. For example, it’s well-known that home office expenses are deductible for some remote workers. But eligibility is not as simple as putting your nameplate on your kitchen table. Spaces must be used exclusively for business purposes to qualify for a deduction.

Deductions may be determined using either the simplified or the regular method:

•   The simplified method provides a deduction of $5 per square foot for up to 300 square feet of eligible space, or $1,500.

•   The regular method is based on the percentage of expenses associated with your workspace and requires detailed record keeping to calculate.

Also, the home office expense is available only to self-employed workers who adhere to strict guidelines, not all remote employees. Per the IRS, employees “who receive a paycheck or W-2 exclusively from an employer” may not take the deduction. Such employees may also need to file a nonresident tax form in the state where they worked.

Learn From the Pros

It’s important to note no two tax returns will ever look the same, and for remote or freelance workers in particular, considerations may change significantly from taxpayer to taxpayer.

With that in mind, while the affordability of tax preparation software makes these programs attractive, it may be prudent to hire a professional in your first year as a freelancer, or when working in a different state than your employer. That way you can ensure you don’t miss anything, while also identifying any potential cost savings you might not otherwise be aware of.

Either way, to be safe, contractors should carefully keep track of all income and expenses – and while they’re at it, the tax code’s fine print.

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