The Work From Home Revolution – 3 Tax Concerns for Business Owners when Ditching the Physical Office
Written by: Ceinwyn Rudnick, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
Though I may be personally in denial, we are well on the way to wishing 2020 farewell. I remember the last time I felt normal, very vividly. My husband and I were at a construction convention in Las Vegas for his company. We went to dinner, took pictures by tires on equipment 100 times my size, and gave away a little money to slot machines. It was amazing! By the end of the convention, booths were shuttered early, and people scrambled to get on flights back home as the Strip emptied out in an eerily apocalyptic scene.
All across the world, physical offices suffered the same fate. People left their desks without a clue of when they would return. Some never have. Some never will. A prime example is the sparkling new REI corporate campus near Seattle, which is now for sale as they have fully transitioned to working from home.
Obviously, this trend is here to stay.
So what does that mean for us small to medium size business owners? Well- there is some good news and bad news. The good news is that your talent pool suddenly became exponentially larger, and you are not tied to geographic areas with very high pay rates. For workers, perhaps they also have access to better-paying jobs and upward mobility that previously was not possible. But this also comes with challenges such as managing your team effectively and creating connections when there is no casual chat or downtime together. In addition, as an accountant, I work hard to make sure my clients can tackle the three biggest tax and accounting challenges that come with having a work-from-home team.
So what exactly are these three hurdles, and how can you overcome them?
1) Your employees cannot take a tax credit for their home office.
Many people who have worked from home historically took advantage of deducting their home office expenses on their taxes. When the Tax Cuts and Jobs Act was passed, all the miscellaneous deductions on Schedule A (itemized deductions) went completely away, including unreimbursed employee expenses. This means that if you ask your employees to spend out of their own pockets to furnish their home office, whether it is something small like pens or something large like a computer. They will be doing so out of their own pocket in a way that is not tax-deductible. They may not blink right now, but I am willing to bet that after most employees file their 2020 taxes and discover these expenses are not deductible, they will be coming back to their employers asking for a stipend or reimbursement. Be ahead of the game here and create a policy to reimburse or purchase office supplies for your employees, and you will create a positive and proactive environment where employees feel taken care of.
2) Know who is an employee and who is a contractor.
There seems to be a trend towards hiring workers as contractors rather than employees, especially when working remotely. It is important to label employees and contractors correctly; just because you are not physically together in an office does not mean your workers are automatically contractors. Rules vary by state, but the IRS provides some basic guidelines at a federal level. Ask yourself these questions. Do you control what work and when it is done? Do you evaluate the work done? Do you provide training to the worker? Is the work regular and on-going? If you answer yes to most or all of these questions, it is likely that your worker is an employee. If you misclassify them as an independent contractor, you could be liable for employment taxes plus penalties. Don’t let this be you!
3) Know where you stand with income tax laws when your employees live and work in a different state
Congratulations! You now have access to a pool of talented and amazing employees across the country! But wait- get ready to deal with a patchwork of state laws that will make your head spin. Making your best hire regardless of geography, is a great gift of the work from home revolution, but it comes with a price. When you hire an employee out of state, you will have to register with that state and setup employer accounts and withholding for each state you hire. I have personally spread my workforce across three states, and the task has so far been more annoying than daunting. This is mostly since there are payroll providers (we are a Gusto partner) that will take the heavy lifting off your shoulders once you register for your initial accounts. This isn’t an insurmountable task, but make sure you know before you go on a nationwide hiring spree that you will have some boring admin work to do to ensure your team is paid properly.
I have mixed feelings about the massive amount of change we have all been subjected to under such stress, and in such a short amount of time. However, I relish the chance to make the best of our new frontier and continue to personally build my team with the best people I can find-whether over Zoom or a handshake. I also strive to make sure our clients also thrive in this new frontier of remote work, new rules, and ever-changing boundaries.
Ceinwyn Rudnick, Executive Contributor Brainz Magazine
Ceinwyn Rudnick is an Enrolled Agent and Certified Tax Coach based in the Pacific Northwest. She opened her boutique accounting firm, Veritas Accounting Solutions PLLC, to help business owners realize the benefits of transitioning their accounting services to the cloud. Recently she has completed advanced training through the AICTP to become a Certified Tax Coach-making tax planning a leading service offered by Veritas Accounting Solutions PLLC. Ceinwyn has two degrees, a B.A. in English Education as well as a B.S. in Accounting. She loves helping her clients achieve a better understanding of the role accounting, money and taxes play in their business. Her goal is to guide business owners to a place of peace and confidence regarding their taxes and finances through education and customized tax planning.