Are you Deducting Your Housekeeper?
Home Office Deductions
When you have a home-based business, time is truly precious. Sure, you have the flexibility to do things that people who work a nine to five job can’t do, and have the several home office deductions available, but you also often wind up working much longer hours, too. By the time you’re done working, there’s so little precious time to spend with family, the last thing you want to do is clean the house. For many small business owners, a housekeeper is just the solution they need.
Not only that, if you have a home office where you have customers or clients visit you, you want to make sure everything is tidy and presentable. Keeping your office in top shape is a legitimate business expense. That means tax implications.
Household employee or independent contractor?
The first thing you need to do is figure out if the housekeeper is your employee or if she’s an independent contractor. If you hire her through an agency, she’s the latter; if not, it may be a little more complex. (The IRS offers a guide on determining whether you have a household employee, and what your employment tax obligations might be.)
The long and short of it is this: if you have a household employee, you’re going to be paying employment taxes, and possibly withholding federal income taxes. If you have a contractor, you don’t have to worry about those things. In both cases, you can deduct some or all of your expenses. Home office deductions like these can greatly ease your small business’ tax liability.
If you incorrectly classify an employee, you can be looking at some serious penalties from the IRS. You need to make sure and thoroughly discuss the housekeeper with your tax professional so that you know which category he falls into. The same goes for taking out employment taxes if he does fall into the “household employee” category, otherwise you could be looking at having to pay back taxes as well as fees.
Home office deductions- expenses
If you’re already claiming business use of your home, you’ll have a much easier time of claiming a deduction for your housekeeper. The key is this: the same percentage of your home that’s being used for business is the same percentage of the expense you can claim for the housekeeper. (more…)
