Self-Employed Expense question

[MJ]

While I have been happily retired for MANY years, my wife who is younger than me as begun working in a new career. Unfortunately there is no work near us so she has much more job opportunities in a major city about 1 1/2 to 2 hours away during rush hour so she rents a room not far from her job. She currently working as a contractor. Will her expenses (rent, car usages, food, work attire etc.) be tax deductible? I do want to add that the next job could be even further from our home so a room would still be necessary. I have been doing my own taxes for 20 years but have never been in a situation like this.

 

[wolf]

IMHO. Yes. Keep good records. You might want to use a "tax professional", the first
year. Then, you can just "copy", it when doing subsequent tax years.
(you mention you've been doing your own taxes for 20 yrs. So I assume you have
a basic knowledge of tax rules.).

 

[Kerfuffle]

Here is the IRS guidance: https://www.irs.gov/taxtopics/tc511

I don't think a 1 1/2 to 2 hour commute meets this requirement: "You're traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day's work, and you need to get sleep or rest to meet the demands of your work while away."

There are also some other limitations that would make me question the viability of deducting some of these items.

Clothing is almost never deductible.

But for sure, check with a tax professional.

 

[cathy63]

When you say she's a contractor, do you mean she's being paid on a 1099? I ask because it's common in some industries (like tech) to call temporary or outsourced staff contractors even though they're really W-2 employees of a staffing company.

If she gets a 1099, then you will need to file Schedule C and Schedule SE. You should also consider whether you need to pay estimated taxes throughout the year. If her contract is for a fixed duration of less than a year, then her travel and living expenses (mileage, food, lodging) are probably deductible. Clothing is never deductible unless it's a required uniform that she has to purchase from her own funds. If the contract is expected to last over a year, then the travel and living expenses are not deductible.

If your wife receives a W-2 from a staffing company, then none of her expenses are deductible on your tax return, but her employer may choose to reimburse her and that reimbursement would not be taxable income.

 

[OldShooter]

Probably not. Work attire IIRC is deductible only if it is specialized and can be worn only for work. (https://www.hrblock.com/tax-center/...ns/are-work-clothes-and-tools-tax-deductible/) Lodging not deductible unless due to a requirement of the customer. (https://www.investopedia.com/terms/l/lodging-expenses.asp) Commuting mileage not deductible. (https://www.firmofthefuture.com/content/when-is-travel-for-independent-contractors-deductible/) I used to have a CPA who said "If you don't get audited once in a while you aren't trying hard enough." So you could roll the dice considering that only a tiny fraction of personal returns are audited. If you get caught but can show a good faith effort to comply (like misunderstood citations from IRS publications), the IRS may charge only interest and waive penalties. May, not will.

 

[RE2Boys]

As Kerfuffle pointed out, read Tax Topic 511. It has a pretty good discussion of tax home and what is deductible when your family home is in one location and your work home is in a different location. More information is in IRS Pub 463 regarding establishing a "tax home"

Your wife will need to determine where her tax home is. Essentially living expenses at her tax home are NOT deductible, even if she is self-employed. Her tax home is the general area where she primarily performs the work she is being compensated for. The only travel expenses (transportation, lodging, meals) that are deductible is travel away from her tax home to perform work. Going to/form tax home and family home is not deductible.

 

[chassis]

@MJ Home office expense is allowed, if this applies to your wife's situation.

Count the square feet of office, divide by total square footage of the house.

Apply the above percentage to mortgage, property taxes, utilities, etc. This amount is deductible as a business expense as long as she is self employed.

Office equipment (laptop, printer, software) is allowed.

 

[Sunset]

OP - If she gets a 1099, so is really a contractor. Open a self 401K (ira and roth).

I use Vanguard, it has to be done before the year is up and takes a while. The reason I'm advocating this is because the contribution limit is much HIGHER than a normal 401K (as she will be the employer and employee for contributions).

https://investor.vanguard.com/small-business-retirement-plans/individual-solo-401k

" Total contributions As a business owner, you can contribute both as an employer and employee. The combined amount of employer plus employee contributions can't exceed $57,000 for the 2020 tax year ($63,500 if age 50 or older) and $58,000 for the 2021 tax year ($64,500 if age 50 or older)."

 

[Kerfuffle]

@MJ Home office expense is allowed, if this applies to your wife's situation.

Count the square feet of office, divide by total square footage of the house.

Apply the above percentage to mortgage, property taxes, utilities, etc. This amount is deductible as a business expense as long as she is self employed.

Office equipment (laptop, printer, software) is allowed.

This is a good example of why you shouldn't take advice from the internet. Home office expenses are not always allowed. Please check with your tax advisor. And the IRS Guidance.

 

[Surewhitey]

OP - If she gets a 1099, so is really a contractor. Open a self 401K (ira and roth).

I use Vanguard, it has to be done before the year is up and takes a while. The reason I'm advocating this is because the contribution limit is much HIGHER than a normal 401K (as she will be the employer and employee for contributions).

https://investor.vanguard.com/small-business-retirement-plans/individual-solo-401k

" Total contributions As a business owner, you can contribute both as an employer and employee. The combined amount of employer plus employee contributions can't exceed $57,000 for the 2020 tax year ($63,500 if age 50 or older) and $58,000 for the 2021 tax year ($64,500 if age 50 or older)."

^^This has been a life saver for us. We're firmly in the 24% fed bracket and we max out the >50 amount ($26k) + 20% of company profits. Really goosing my pre-tax accounts.

One day I'll be rolling over to a Roth...

 

[chassis]

This is a good example of why you shouldn't take advice from the internet. Home office expenses are not always allowed. Please check with your tax advisor. And the IRS Guidance.

@Kerfuffle I agree. The post I quoted above is incomplete and unreliable. Are you a tax professional?

 

[Aerides]

OP, there is a big difference between:

My work requires that I travel, My work requires that I use part of part of my personal home as a 100% dedicated work space

vs.
I decided to create a 2nd residence to avoid a long commute to my job

Your wife's situation is the latter. IMO nothing you've listed will be tax deductible. If your wife is not ready to retire, and you do not live in a place that she can be employed, you're either going to have to both move, or do the calculations to determine if these extra expenses are worth all the effort and time apart.

 

[chassis]

@MJ Expectation of employment of one year or more, vs one year or less, is important.

What is your wife’s expectation?

Read below (aligns with RE2boys’ post):



https://www.irs.gov/taxtopics/tc511

 

[mountainsoft]

Will her expenses (rent, car usages, food, work attire etc.) be tax deductible?

I don't know what is or isn't deductible, but the first question should be whether it would be worth it even if they are. The standard deduction for joint filers is $24,800 (2020). It would take a lot of itemized deductions (and a lot of record keeping) to make it worth it, in my opinion.

Personally, we have never been in a situation where itemizing was worth the trouble. Of course, your situation may differ.

 

[Kerfuffle]

@Kerfuffle I agree. The post I quoted above is incomplete and unreliable. Are you a tax professional?

Former CPA, though I didn't do tax work and am not a tax professional.

 

[cathy63]

I don't know what is or isn't deductible, but the first question should be whether it would be worth it even if they are. The standard deduction for joint filers is $24,800 (2020). It would take a lot of itemized deductions (and a lot of record keeping) to make it worth it, in my opinion.

Personally, we have never been in a situation where itemizing was worth the trouble. Of course, your situation may differ.

These expenses wouldn't be deductible on Schedule A, so the comparison to the standard deduction doesn't come into play.

Business expenses go on Schedule C, and they are subtracted from the business income to determine the net profit upon which you pay tax. Whether these are business expenses depends on the exact circumstances and if this meets the IRS definition of a temporary work location.

 

[mountainsoft]

These expenses wouldn't be deductible on Schedule A, so the comparison to the standard deduction doesn't come into play.

Business expenses go on Schedule C, and they are subtracted from the business income to determine the net profit upon which you pay tax.

Doh! Good point, thanks for the correction. Sheesh, I'm self employed, I should have thought that through.

 

[Sunset]

^^This has been a life saver for us. We're firmly in the 24% fed bracket and we max out the >50 amount ($26k) + 20% of company profits. Really goosing my pre-tax accounts.

One day I'll be rolling over to a Roth...

I found it great as well, and then called Vanguard to add a Roth to it.
No longer deductible, but could stuff the Roth instead or do a mix of contributions. (rules are a bit special for the roth contribution).

I didn't know about it for a while, so missed out on some benefit, until I learned.

 

[MJ]

When you say she's a contractor, do you mean she's being paid on a 1099?

Yes, I should have included this in my initial post. Yes, she will be getting a 1099-NEC.
I am using tax software and have been treated her money as business income under schedule C and SE and have been entering her "business expense" per quarter. Using the software to determine the estimated quarterly tax for 2021. Since she doesn't need the money she's getting, I looked into the option to just rolling all her income to a 401K but according to the Vanguard website she needs to have an EIN.

 

[MJ]

I just read the IRS pub 511 and it appears that I may not be able to deduct her expenses. I'll have to determine if it's worth the cost of going to a tax account to get advice. Depending on the caliber of the accountant, they may still give me inaccurate advice.

 

[MJ]

To complicate matters. I file a join return with my wife where the major bulk of our income comes from my nest egg investments plus retirement pensions. According to the IRS, I assume my tax home is where I live while my wife's tax home is where she works which is located in a different city, so how would that work in a joint return?

 

[Sunset]

To complicate matters. I file a join return with my wife where the major bulk of our income comes from my nest egg investments plus retirement pensions. According to the IRS, I assume my tax home is where I live while my wife's tax home is where she works which is located in a different city, so how would that work in a joint return?

When I worked in a far away city for 6 months, M-F and rented a room in a house, I considered my home to be my tax home.
As that is where my spouse, house, drivers license etc all stated I lived.
This is similar to how a Country/State views where you live, where is your stuff and where are you registered, when less than 180 days.

So I deducted my rent and travel (flights mostly) and computer. I didn't deduct my commute from my rented room to the office, which is not allowed.

We filed a joint return as normal, except that I had the additional forms for claiming my self employment expenses (rent and travel and computer, etc).

My work was less than a year, If her work is longer, maybe she should rent a big enough place for both of you, and you can split your time ?

 

[USGrant1962]

...

Since she doesn't need the money she's getting, I looked into the option to just rolling all her income to a 401K but according to the Vanguard website she needs to have an EIN.

Getting an EIN solely for the purpose of opening a solo 401(k) takes about one minute. That EIN affects nothing else. You should do it.

https://www.irs.gov/businesses/smal...-an-employer-identification-number-ein-online

As someone said in another thread, the IRS hands out EINs like candy at Halloween. The only limit is that you can only get one per day!

 

[MJ]

Getting an EIN solely for the purpose of opening a solo 401(k) takes about one minute. That EIN affects nothing else. You should do it.

https://www.irs.gov/businesses/smal...-an-employer-identification-number-ein-online

As someone said in another thread, the IRS hands out EINs like candy at Halloween. The only limit is that you can only get one per day!

I thought I read the requirements in one of the IRS website that my wife was no eligible but then again I was looking into it as a business tax option not a pension option. I guess I'll have to review it one more time Thanks.