As technology continues to challenge the traditional paradigm of employees and “the office,” many businesses and individuals find calculating taxes for work done outside company office space to be confusing. According to statistics from the U.S. Census Bureau’s American Community Survey, there are now an estimated 3.2 million full-time employees who telecommute for at least half the workweek, up 79 percent since 2005.
Many freelance workers and independent contractors also conduct business outside of a traditional office, raising questions as to how their work-related taxes should be calculated.
“Businesses and individuals need to be aware of the impact emerging trends in ‘virtual work’ have on their taxes,” said Mark Sellner, a CPA at Sellner Tax Consulting, LLC, in Plymouth. “If you live in Eau Claire and maintain a home office, and you work for a company based in Woodbury, you may pay different tax rates on the days you ‘Skype in’ to meetings vs. the days you attend in person. It’s also very important for businesses and individuals to make smart decisions about who’s an employee and who’s an independent contractor.”
The Minnesota Society of Certified Public Accountants has assembled a list clarifying the common concerns related to this topic. Important considerations include:
• Home office deductions
Individuals with space in their homes exclusively designated as their primary place of business are eligible for a home office tax deduction.
Employees are likely ineligible for a home office deduction if they maintain another physical workspace in an office provided by their employer. The key distinction is whether the home office exists for the convenience of the employer or the employee. Thus, those working from home primarily to avoid rush hour traffic are not eligible.
The dollar value of a home office deduction is based on the percentage of the entire home the office-dedicated space occupies. The IRS allows $5 per square foot, up to 300 feet, or actual costs based on square footage. This percentage can also be used to claim a deduction on a utility bill and other costs of maintaining the home. Equipment used exclusively for work purposes may be fully deductible.
To understand how much of their income is subject to Minnesota taxation, non-resident employees of Minnesota-based companies must divide the number of workdays they were physically present in Minnesota (as opposed to days they spent telecommuting from out-of-state) by the number of days they were eligible to work.
Freelancers and contracted associates working for a Minnesota-based company from another state are not required to pay Minnesota income taxes if they do not provide services in the state.