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.
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.
Looking for more stories like this? Check out On the Money — SoFi’s one-stop-shop for news, trends, and tips!
Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Advisor
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.