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Merlo
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Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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Can a W-2 employee deduct home office expenses?

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According to the IRS, if you are a W-2 employee, but not listed as a statutory employee (which means that the employer "did withhold federal income taxes"), then you are only eligible to deduct your "necessary but unreimbursed business expenses" as Schedule A- Form 2106 expenses, and that none of those expenses can" be allocated to Schedule C-Home office expenses".

My question is what if someone is that same W-2 employee talked about above, but actually earns their entire W-2 as a "100% based commission employee", and who have a "home office set up for the convenience of the employer". Can this employee be eligible for deducting their home office expenses, or does it become a moot point because in fact the W-2 employer actually provide an "office space" for, the W-2 employee to work out of, " in addition to the W-2 employees home office location".

The IRS allows you to deduct unreimbursed employee business expenses, including use of a home office space, if the expense is considered to be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or profession. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required by your employer in order to be considered necessary.

So even if the employer does not require that you work from home, if having a home office is somehow helpful to you in your line of work, then you may claim a deduction for that expense. An example of this might be that by working at home you can work an extended schedule which would allow you to contact more customers outside of normal business hours. Or perhaps working at home allows you more time to research potential leads.

Keep in mind that in order to claim a deduction for home office expenses, you must actually have an area in your home which is strictly dedicated to office use. Having a computer set up in your family room or bedroom would not qualify for deducting a home office expense.

Thank you.

Customer: replied 6 years ago.

My continued question is how does one respond to the comment that if you are a "W-2 employee", you can "only deduct home office expenses" if your employer has checked the box on your W-2 that designates you as a "statutory employee", regardless if you earned your income as a 100% commissions earned employee, and therefore all of "your necessary but unreimbursed business expenses must be listed under Form 2106".

Your information appears consistent with other research items that I have reviewed, however, I again would like to ask two more items that I outlined earlier, which would be:

1) I thought there were three types of individuals who can claim expenses related to operating an office in the home: a) salaried employees (I am assuming they mean statutory employees), b) employees on commission, and c) self-employed individuals.

2) Is there not an exception to that home office rule for the "W-2 employee who earns their income on a "100% commission basis" who is in effect an "outside sales person" receiving a W-2, who has an "outside office" set up for the convenience of the employer, which coincides with the research I found of a physician who maintained a medical office (W-2 income) as well as an office in his home, where he was able to demonstrate that he "met" with his patients, and regularly took phone call calls in his home office.

Hello,

Basically there are 3 types of worker classifications:

1. Regular W-2 employees

2. Statutory employees

3. Independent contractors (or self-employed individuals)

A regular W-2 employee can be either a salaried, hourly or commissioned employee. The employer deducts all applicable federal and state income taxes as well as SS and Medicare taxes from the employee's pay.

Statutory employees are basically treated the same as an independent contractor, with one big exception. They are not liable for paying their own SS and Medicare taxes. For purposes of those two taxes only, they are paid as an employee, and the employer withholds those taxes from their pay. But a statutory employee pays all of his own federal and state income taxes.

Independent contractors have no taxes withheld at all from the income they receive.

Regular employees report all of their income on Form 1040. Any unreimbursed business expenses which they have are claimed by filing Form 2106, and then claiming those expenses as part of your itemized deductions on Schedule A. The deductions in that category are limited to those which exceed 2% of your adjusted gross income.

Both statutory employees and independent contractors are treated as self-employed individuals. They both report their income and business expenses on Schedule C. Their net income after expenses is then what is subject to tax. They are not subject to that 2% limitation on business expenses.

As a regular employee, even though you are paid strictly on commission, since you are not classified as a statutory employee, you cannot report your business expenses on Schedule C. There are no exceptions to this rule. You may, however, still claim a deduction for your unreimbursed business expenses, including a home office, by claiming those expenses on Schedule A.

In the example that you cited above about the physician, if he was working as a W-2 employee (the same as you are) and he also had an office in his home, then he could deduct his home office expenses, but they would be deducted on Schedule A, and not on Schedule C.

The only real difference you have here with your expenses is that you will be reporting them on Schedule A which is subject to the 2% limitation. But that is the only place that a regular W-2 employee is allowed to take a deduction for business expenses.

Thank you.

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