In addition to causing untold health and economic damages, the COVID-19 pandemic has had a profound—and possibly permanent—impact on many longstanding workplace practices. For example, although working from home began as a temporary emergency response, a number of high-profile companies now say they plan to continue the practice in their post-pandemic operations.
Choosing to maintain remote worker arrangements as a permanent fixture raises a number of questions. In addition to evaluating how a dispersed workforce will affect corporate culture, efficiency, morale, and productivity, companies must also consider the possible tax consequences of paying employees to work from home.
Home Office Expense Options
One of the first questions companies must consider is who pays for the expenses associated with maintaining a home office? Workers who are engaged as independent contractors can generally deduct home office expenses from their taxable income, but the Tax Cut and Jobs Act eliminated the home office expense deduction for W-2 employees until 2026. What’s more, it also eliminated the deduction for other unreimbursed employment expenses, such as the cost of a home office computer, printer, cell phone, and office supplies.
Companies have three main options for handling such expenses. The first option, requiring employees to purchase office equipment and supplies without reimbursement or a tax deduction, is obviously unpopular—and often illegal. Many states now require employers to reimburse employees for necessary job expenses.
In the second option, the company purchases and owns the equipment, and the employee must return it on demand. Inevitably, employer-provided cell phones and computers are sometimes used for personal purposes, but as long as the equipment is used primarily for business, IRS Notice 2011-72 says occasional personal use is a “de minimis fringe benefit” that is not counted as income.
Note, however, that Notice 2011-72 applies specifically to company-owned equipment. It does not apply if a company reimburses employees for the use of their personally owned equipment or for expenses such as phone bills or internet service. Such reimbursements would need to be reported as taxable income to the employee.
Companies can avoid putting this burden on employees through the third option: establishing an “accountable plan.” To set up an accountable plan, a company must modify its written employment contracts to specify that working from home is a condition of employment and is being done at the convenience of the employer, not merely because the employee chooses to. The plan must also spell out the company’s expense reimbursement policy in detail, including employees’ record-keeping and documentation requirements.
In addition to tax-free reimbursement for equipment and out-of-pocket expenses, an accountable plan could also allow a company to provide tax-free reimbursement to employees for the use of office space within their homes. Note, however, that the space must be a separately identifiable space that is used exclusively for business purposes. It must also be used for business on a regular basis, not just occasionally, and employees must keep timely records that show this.
IRS Form 8829—the form that self-employed taxpayers use to claim the home office deduction—provides valuable guidance in this area. Even though employees are not required to file it, this form offers a useful model for documenting and calculating home office expenses. In addition, companies should review their employment contracts and other documentation with their tax advisors to make sure they are in full compliance.
Multistate Tax Issues
If an employee’s home is located in a different state from the company’s premises, work-from-home arrangements could also raise additional personal and business tax questions.
For instance, because employees generally pay income tax to the state where they work, companies might need to withhold taxes and submit them to an employee’s home state, where the work is actually done. Many states have reciprocal agreements with neighboring states, which can simplify things, but employers should first verify that such an agreement is in place and then clarify how it applies to employees working from home.
Remote workers can also create corporate income tax and sales tax issues. Even before the pandemic, the shift to a service-based economy had already caused many states to reconsider how they determine what portion of a company’s revenues and income are subject to tax. The pandemic and the rise of telecommuting only added to the uncertainty.
So far, only a handful of states have issued specific guidance regarding the tax questions that arise when employees work remotely from other states—yet another reason why companies should consult with their tax advisors when establishing work-from-home arrangements.
Please contact us with any questions you may have on this matter. We would be happy to assist you.