Home Office Deduction &

by | Dec 12, 2017 | Blog, Taxes | 0 comments

Getting Comfortable With The Home Office Deduction

One of the great things about setting up a home office is that you can make it as comfy as possible. Assuming you’ve done that, another good idea is getting comfortable with the home office deduction.

To qualify for the deduction, you generally must maintain a specific area in your home that you use regularly and exclusively in connection with your business. What’s more, you must use the area as your principal place of business or, if you also conduct business elsewhere, use the area to regularly conduct business, such as meeting clients and handling management and administrative functions. If you’re an employee, your use of the home office must be for your employer’s benefit.

The only option to calculate this tax break used to be the actual expense method. With this method, you deduct a percentage (proportionate to the percentage of square footage used for the home office) of indirect home office expenses, including mortgage interest, property taxes, association fees, insurance premiums, utilities (if you don’t have a separate hookup), security system costs and depreciation (generally over a 39-year period). In addition, you deduct direct expenses, including business-only phone and fax lines, utilities (if you have a separate hookup), office supplies, painting and repairs, and depreciation on office furniture.

But now there’s an easier way to claim the deduction. Under the simplified method, you multiply the square footage of your home office (up to a maximum of 300 square feet) by a fixed rate of $5 per square foot. You can claim up to $1,500 per year using this method. Of course, if your deduction will be larger using the actual expense method, that will save you more tax. Questions? Please give us a call.

 

Have A Household Employee? Be Sure To Follow The Tax Rules

Many families hire people to work in their homes, such as nannies, housekeepers, cooks, gardeners and health care workers. If you employ a domestic worker, make sure you know the tax rules.

Important distinction

Not everyone who works at your home is considered a household employee for tax purposes. To understand your obligations, determine whether your workers are employees or independent contractors. Independent contractors are responsible for their own employment taxes, while household employers and employees share the responsibility.

Workers are generally considered employees if you control what they do and how they do it. It makes no difference whether you employ them full time or part time, or pay them a salary or an hourly wage.

Social Security and Medicare taxes

If a household worker’s cash wages exceed the domestic employee coverage threshold of $2,000 in 2016, you must pay Social Security and Medicare taxes — 15.3% of wages, which you can either pay entirely or split with the worker. (If you and the worker share the expense, you must withhold his or her share.) But don’t count wages you pay to:

  • Your spouse,
  • Your children under age 21,
  • Your parents (with some exceptions), and
  • Household workers under age 18 (unless working for you is their principal occupation).

The domestic employee coverage threshold is adjusted annually for inflation, and there’s a wage limit on Social Security tax ($118,500 for 2016, adjusted annually for inflation).

Social Security and Medicare taxes apply only to cash wages, which don’t include the value of food, clothing, lodging and other noncash benefits you provide to . You can also exclude reimbursements to employees for certain parking or commuting costs. One way to provide a valuable benefit to household workers while minimizing employment taxes is to provide them with health insurance.

Unemployment and federal income taxes

If you pay total cash wages to of $1,000 or more in any calendar quarter in the current or preceding calendar year, you must pay federal unemployment tax (FUTA). Wages you pay to your spouse, children under age 21 and parents are excluded.

The tax is 6% of each household employee’s cash wages up to $7,000 per year. You may also owe state unemployment contributions, but you’re entitled to a FUTA credit for those contributions, up to 5.4% of wages.

You don’t have to withhold federal income tax or, usually, state income tax unless the worker requests it and you agree. In these instances, you must withhold federal income taxes on both cash and noncash wages, except for meals you provide employees for your convenience, lodging you provide in your home for your convenience and as a condition of employment, and certain reimbursed commuting and parking costs (including transit passes, tokens, fare cards, qualifying vanpool transportation and qualified parking at or near the workplace).

Other obligations

As an employer, you have a variety of tax and other legal obligations. This includes obtaining a federal Employer Identification Number (EIN) and having each household employee complete Forms W-4 (for withholding) and I-9 (which documents that he or she is eligible to work in the United States).

After year end, you must file Form W-2 for each household employee to whom you paid more than $2,000 in Social Security and Medicare wages or for whom you withheld federal income tax. And you must comply with federal and state minimum wage and overtime requirements. In some states, you may also have to provide workers’ compensation or disability coverage and fulfill other tax, insurance and reporting requirements.

The details

Having a household employee can make family life easier. Unfortunately, it can also make your tax return a bit more complicated. Let us help you with the details.

MORE ARTICLES FROM OUR BLOG

A recipe for taxes…

GMP has not memorized the tax code like we have the Joy of Cooking, but we reference both a lot. If your current accountant is not the advisor you hoped them to be, or you want more dark chocolate M&Ms in your life, GMP would love to talk to you about your business. We may even bring cookies!

QBO v Xero a practical dissertation

is a silver partner, which does not mean that we are in second place, it just means that we are growing (and there is room for improvement). Our firm’s preference is clearly with as far as online platforms and the reasons are many. Rather...

Want to see how we work? Read exemplary audit management letter by GP CPA!

We recently had an engagement that required GP CMP to gather data from several different softwares and create enough of a documentation trail to support an audit. The results of our work was reported to management in a letter of recommendation, which we...

Cost segregation

Dear Client:Cost segregation is the magic sauce that breaks your real property into its components and some of these components can depreciate much faster than the typical overall standard 27.5 or 39 year periods. This magic sauce is brought you courtesy of a...

TCJA Allows Bonus Depreciation on Purchase of Leased Vehicle

Allows Bonus Depreciation on Purchase of Leased VehicleBefore (), your purchase of the vehicle you were leasing did not qualify for either Section 179 expensing or bonus depreciation. But times have changed. The made two changes...

Court-Approved Way to Defeat IRS Penalties

Court-Approved Way to Defeat IRS Penalties Like you, does not like IRS penalties. That’s why we keep you up to date on new ways you can beat the IRS at its penalty game. We have previously outlined a new and potentially powerful penalty abatement strategy that...

Technology that GP CPA is currently using

We are approaching mid-year (for those of us on a calendar year…) and enough time has passed that we can reflect back on some of the technology that GP has been using and is no longer using in 2019. First up, let’s have a drink for those who are no longer with us:...

Tina Simmons
Tina Simmons
13:38 17 May 19
This team is dedicated to their clients and committed to understanding your business and sharing their knowledge to help you succeed. I love working with these folks, they take the worry and uncertainty out of and taxes!read more
Bravo4 Autowerks
Bravo4 Autowerks
12:55 08 May 19
Gary and his team have been fantastic for me and my business. They respond well to all my questions, are very helpful and of course keep my financials in order. Highly recommended.read more
Queen City Newborn Care
Queen City Newborn Care
15:57 02 Apr 19
I was drowning before I met Justin. He totally transformed how I run my small business and has gotten me organized in ways I didn't even know were possible. I am so grateful for his advice and suggestions! This company is worth every penny.read more
Dennis Bloomberg
Dennis Bloomberg
16:01 26 Mar 19
Unfortunately, I found GMP when my mother passed. She had a trust set up and I had no experience with one. I received excellent advice prior to filing taxes, that allow for the transfer of assets with little tax implication. The tax process was simple for me, Justin took over once he had details and cleared up all question from filing our taxes. Thank you for a job well done!read more
Natalie Knight
Natalie Knight
15:35 21 Nov 18
Prusiensky is up to date on technology. They handcraft a platform that works best for your company's accounting services. We really appreciate how hands on and quick their team is when replaying to any type of correspondence. Simply put, they care and want your company to succeed.read more
Ashlyn Lelej
Ashlyn Lelej
14:39 21 Nov 18
I highly recommend Justin at Prusiensky, CPA for all of your accounting and tax needs. I've been a client for over two years, and have been consistently impressed with their dedication to helping my business grow and be financially successful. His advice is invaluable. Thank you!read more
Bobby Nguyen
Bobby Nguyen
22:23 20 Nov 18
My partner and I started our very first small business last year. Justin has been a blessing to us. Being new at all of this, we didn’t understand much of how business taxes work. Justin explained and answer all of questions that we have. He took care of everything for us throughout the year and have made life so much easier for us. I couldn’t have asked for a better CPA. Highly recommended!read more
Next Reviews

CATEGORIES

Pros and Cons of 401(K) Loans & The Tax Impact of a Child’s Investment Income