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Kelly Bullis: How to save tax when an employee works from home

Kelly Buillis

For several years now, many employers have learned to save money by hiring out of state employees to work from their homes.

Let’s look at an example. A Silicon Valley High Tech company hires a highly qualified woman who lives in Nevada. Right away, the California-based company has saved money by paying its Nevada employee less since the Nevada employee is not subject to California Income Tax while working in Nevada.

Most of the time, this arrangement works well for the employee as well. No commuting time. No frustrating daily drives on a crowded freeway. Lower cost to own a home in Nevada than in the Silicon Valley, slower paced lifestyle, etc.

One of the most overlooked ways to save additional tax though is for the employer to pay the employee rent for the use of part of employee’s home that is used exclusively for work.

Here’s an example. Our Nevada employee, Sally, lives in Jacks Valley and works for a company in the San Francisco Bay area, we’ll call it, Giggles. Giggles wants to increase the total compensation package it pays to Sally by $10,000 a year. Instead of actually raising Sally’s salary, Giggles realizes it can instead pay $10,000 a year rent to Sally for the use of a room in her house she uses exclusively for working for Giggles. The $10,000 Giggles pays Sally is a deductible expense for Giggles and reportable rental income by Sally.

This immediately saves Giggles $750 a year in Employer Social Security and Medicare tax as well as saving Sally the same amount, too. Sally can now deduct the direct costs of providing a portion of her home against this $10,000 annual rental payment rather than deducting only a part of it as a Miscellaneous Itemized Deduction (done by reporting employee business expense, reduced by 2 percent of her Adjusted Gross Income). Thus, it’s like Sally got a raise much higher than $10,000, but it cost her employer less than $10,000 to give it to her.

The key issues here that must be followed are, 1: Giggles must be a “C” Corporation; 2: Sally must only use the area in her home exclusively for work on Giggles; 3: The amount must be a fair rental Giggles would pay for renting a similar sized office for Sally in the vicinity of her home.

Can this arrangement work for Fred who owns his own “C” Corporation here in Nevada and does all his bookkeeping/payroll/inventory ordering from a room in his home he uses exclusively for his business? Absolutely! Fred just needs to meet the same three key issues Sally and Giggles had to meet.

Did you hear? “What this country needs are more unemployed politicians.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.