Tax Deductions for Employees who Work from Home

Recently, a reader named Lisa asked me about tax deductions for employees who work from home. Here is Lisa’s question:

My husband will begin working from home 3 days per week beginning at the end of this month and will need to travel to his company’s site the other 2 days. Can you please provide any information that may be helpful when tax season comes? I am wondering will he be able to write off some expenses he incurs while working from home such as internet, phone etc.

Tax deductions for the self-employed are fairly well known (home office deduction, for example). But breaks for employees present an entirely different question. My first reaction was that employees would have no possible deductions. But I was dead wrong.

Now, before I get into the details, let me remind you that I am NOT a tax professional. For tax advice, consult a tax specialist. I did do some research, though, and here’s what I found.

Home Office Deduction

To my surprise, an employee who works from home can, under certain circumstances, qualify for the home office deduction. That being said, based on my research, I suspect must employees who work from home will NOT qualify for this deduction.

The definitive guide to the home office deduction is IRS Publication 587–Business Use of Your Home (pdf). To qualify for this deduction if you are self-employed, you must use your home:

• Exclusively and regularly as your principal place of business (defined later), or
• Exclusively and regularly as a place where you meet with patients, clients, or customers. (You can see more about what the IRS says on home office deductions here.)

There are other requirements that you’ll see in the publication (e.g., if you run a daycare or store inventory in your home), but you get the idea. But here’s the catch. If you are an employee, you must meet two additional requirements:

1. Your business use must be for the convenience of your employer, and
2. You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer

It’s the first requirement that will trip up most employees. Typically, an employee works from home for their convenience, not their employer’s. In IRS Publication 587, you’ll find some helpful examples. From what I can tell, if your employer provides you with work space and does not require you to work from home, you won’t qualify for the deduction. But again, be sure to consult a tax professional.

If you do qualify for the deduction, you’ll use IRS Form 8829–Expenses for Business Use of Your Home.

Unreimbursed Business Expenses

If you incurred expenses related to your employment that were not reimbursed by your employer, you may qualify for a deduction. I say “may” because most won’t. First, you have to itemize your deductions using IRS Schedule A. If your itemized deductions don’t exceed your standard deduction, then these expenses won’t help you.

Second, the expenses must qualify for the deduction. Basically, the work related expense must be “ordinary and necessary.” While this doesn’t mean required, it does need to be helpful and appropriate for your business.

Third, and most important, you can only deduct these business expenses to the extent they exceed 2% of your adjusted gross income. These types of deductions fall under the Miscellaneous Deductions category, all of which have this 2% of AGI limitation. As a result, many want qualify for these deductions.

You can read more on this topic from IRS Publication 529–Miscellaneous Deductions. Start with page three of the publication.

As I said at the start, I’m not a tax professional. So consult one for advice about your specific situation. Also, tax software like TurboTax and TaxAct can walk you through these deductions if you do your taxes on your own.

Finally, if I’ve missed a potential deduction, please leave a comment below with information on other possible deductions.

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