Have a Tax Question? Ask a Tax Expert
Hello JA Customer,
The IRS considers your "tax home" to be the entire general area of where your main place of business or work is located, regardless of where you maintain your family home. You cannot deduct any expenses associated with living in your tax home area and you cannot deduct any travel expenses for going back and forth between your tax home and your family home.
Refer to the following IRS web page which addresses this topic in more detail, and provides the following specific example:
For example, you live with your family in Chicago but work in Milwaukee where you stay in a hotel and eat in restaurants. You return to Chicago every weekend. You may not deduct any of your travel, meals, or lodging in Milwaukee because that is your tax home. Your travel on weekends to your family home in Chicago is not for your work, so these expenses are also not deductible. If you regularly work in more than one place, your tax home is the general area where your main place of business or work is located.
Your rental expense for a house in NC would not be a deductible business expense since NC would now be your tax home. You could, however, deduct a percentage of the rental fee and the utilities as it relates to the percentage of the home you would use as a home office.
Thank you JA Customer
So, speaking in terms of compensation, I would be able to write off things like cell phone, mileage back and forth to the office, etc correct? At the numbers I gave, does it make sense to take the contract position as self employeed? Salaried at 97K, W2, and contract at 70 an hour with at least 40 hours a week seems to be the smarter decision tax wise. Am I off base here?
Yes, as an independent contractor you will be able to deduct any expenses you have in connection with your IC income. That would include such things as your mileage to and from client locations, business use of cell phone, the percentage of rent and utilities as it relates to the percentage of the home you use as a business office, the cost of your business cards and business advertising, the cost of business licenses you must hold, and things of that nature.
As far as your contract position versus the IC position, it appears you will come out well ahead with the IC position, at least once you sell your home in TN and make a permanent move to NC where you will not be making both a house payment and a rental payment.
As an IC making $70 and hour for 40 hours a week, that comes out to $145,600 for the year. And of course any expenses you have to deduct from that amount will bring your actual net taxable income down from that amount.
The biggest additional expense connected with being an IC versus an employee is the fact that you become liable for the full share of SS and Medicare taxes instead of splitting those with the employer. So you will be paying an extra 6.2% for SS tax on your first $106,800 of earnings and an extra 1.45% for Medicare tax on all of your earnings, which is normally paid by the employer. This would come out to $6,621 extra you will pay for SS tax and a maximum of $2,111 for Medicare. And even that Medicare is based on the full $145,600 at 1.45%, and that amount will likely be lower after you deduct your business expenses.
But at the very most you would end up paying an additional $8,732 to cover the SS and Medicare taxes normally paid by the employer. Since the amount you will be paid as an IC is $48,600 higher than what you receive as an employee, that additional income more than covers those additional taxes, so this is a smart move for you.
Hello again JA Customer,
You could certainly do that but you are not really gaining any income that way. You are simply moving income that you already have coming in from one household pocket to another. If your wife gets an actual outside job, then of course your total household income increases. If you pay her to work for you then that reduces your business income but increases her income by the same deduction amount, so essentially you have stayed even and not really gained any ground. This might make more sense if you actually did intend to hire an outside person to help you, then instead you may want to consider hiring your wife to keep the money in the family. But if you are just hiring her to give her a job, you are not gaining any ground here.