Published on September 29th, 2008 | by Stephanie Evans0
Simple Recordkeeping for Telecommuters
Telecommuting can offer some tax advantages to companies and employees. How those tax advantages affect each situation depends mostly on whether the telecommuter is considered a regular employee or an independent contractor.
Keeping good records is always essential, but you don’t have to be a financial genius to get all of the deductions you’re entitled to…
Are There Tax Advantages to Telecommuting?
Telecommuting by itself does not offer businesses a tax advantage—the advantage comes mostly in the form of cost savings (see Telecommuting: Benefits for Businesses). However, it’s a good idea to contact your local government to inquire about any business incentives (such as rebates on permits or licenses) for engaging in environmentally friendly practices. Such incentives could also affect your tax obligation.
If the telecommuter is an independent contractor, the company will no longer withhold income taxes from the telecommuter’s check and will not be obligated to carry Workers’ Compensation insurance. It is the telecommuter’s responsibility to pay the income tax directly to the IRS and to local or state tax entities.
Tax issues for independent contractors and offsite employees can be complicated. There may or may not be tax advantages—regardless, the telecommuter needs to keep detailed records of all expenditures.
It is highly recommended that both businesses and telecommuters consult with a Certified Public Accountant or a tax specialist who understands the tax issues involved. You can reduce your costs for such tax help by keeping good records that the tax consultant can easily translate into the necessary forms.
Visit the Internal Revenue Service website to view and download all the necessary forms and the publications. Also look for relevant books by Nolo Press at your local library or bookstore.
Which Records Should I Keep?
Telecommuters enjoy the advantage of reduced commute costs but may find themselves paying for other items out of pocket. Expenses, such as phone bills, electricity, internet service, travel expenses, or computer supplies, may or may not be tax deductible.
To help determine which records you should keep, ask yourself these questions:
- Is this expense necessary for me to conduct business?
- Who paid for the item or service? If the company reimburses the telecommuter for such costs, it is the company who gets the deduction.
It is imperative that you keep all receipts for anything that you will be claiming on your taxes.
- If you have only a few receipts to keep, a single file folder, small box, or large envelope, labeled “Tax Deductibles” is all you need. Just drop them (or copies) into the envelope and take this with you to the tax consultant.
- If you have many receipts to keep, label several envelopes or folders with general expense categories such as: utilities (electricity, phone), office supplies (paper, ink), equipment (computer programs, fax machine), or travel expenses. Rule of thumb: If you’re not sure if it’s deductible, keep it and let the tax consultant help you decide.
- If you’re a contractor, you should also keep records of the income you receive and check this against the 1099 form you will receive at the end of the year from the company. Regular employees will continue to receive a W-2 form at the end of the year.
Whether you have many expenses or only a few, it’s still a good idea to keep a written record of expenditures as a backup in case a receipt is missing or unreadable at the end of the year.
The simplest record-keeping method is a recycled paper spiral-bound notebook for manually recording your expenses on a daily or weekly basis.
- Start a new page each month. For each entry list the date, item, or service purchased, the amount paid, and the name of the company you paid.
- Or devote a page for each expense type. Label your pages to correspond to the envelopes or folders you are using for your receipts.
As a back-up or a primary record, use a computer spread-sheet format—such as Excel or tables in Word documents. Keep these simple, creating columns for each expense type, including one for the date and a wide column for Notes. Add items as they occur in successive rows, entering the date, the amount in the appropriate column, and any notes such as the company’s name or the project the expense applies to.
At the end of the year each column will show exactly what you spent for that category. If you are diligent about making entries, they will also be in chronological order in case you want to review expenses for a particular time period.
If you are required to travel, records should include the date, miles traveled, and the destination or the purpose of the trip, which can prove helpful in the case of an audit. It is unlikely that you can claim mileage expense for trips to the office—even if required—but you may want to track this anyway.
While many people can set up sophisticated spreadsheet formulas or record-keeping systems, the goal is to make this the simplest, no-brainer task you have to do. In doing so, tax time could become your favorite time of the year…maybe!