Home office deduction worth the audit risk? W-2 employee working remotely full-time

I'm a W-2 software engineer working 100% remotely. My company is in SF but I live in Colorado. I have a dedicated 200 sq ft room in my house that's my office - desk, monitors, nothing else, never used for personal stuff.

My CPA says I can't deduct home office as a W-2 employee anymore after TCJA 2017. But I've heard some people still claim it. Seems crazy that my 1099 contractor friends can deduct their home office but I can't even though I WFH the same way they do.

Is there ANY way for W-2 remote employees to deduct home office? Or am I just screwed?

Your CPA is correct. Under the Tax Cuts and Jobs Act (TCJA) passed in 2017, W-2 employees cannot deduct home office expenses from 2018-2025. This is not a loophole or gray area - it's explicitly prohibited.

Before 2018, W-2 employees could deduct home office as an unreimbursed employee expense if it met the "convenience of employer" test. That deduction was eliminated by TCJA.

The TCJA provisions sunset after 2025, so theoretically this could change for tax year 2026+, but that depends on future legislation.

I know it seems unfair, but there's no legal workaround for W-2 employees right now.

What if I formed an LLC and had my employer pay the LLC instead of me? Then I'd be 1099 and could deduct it?

My friend's brother's cousin supposedly does this (I know how that sounds lol) but wondering if it's legit or asking for trouble.

This is called "misclassification" and it's extremely risky for both you and your employer. The IRS and state agencies actively look for this.

If you're doing the same work under the same conditions, just routing it through an LLC doesn't magically make you an independent contractor. The IRS uses a multi-factor test to determine worker classification:

• Behavioral control: Does the company control how, when, where you work?
• Financial control: Do you have business expenses? Opportunity for profit/loss?
• Relationship: Benefits, permanency, integral to business?

If you're working full-time, exclusively for one company, using their equipment, following their schedule - you're an employee, not a contractor. The LLC is just a shell.

If the IRS audits and reclassifies you, you'll owe back employment taxes plus penalties. Your employer could face huge fines.

As an actual 1099 contractor, trust me, the home office deduction isn't as great as you think. Let me break down what I actually get:

My situation: 250 sq ft office, 2000 sq ft house = 12.5% business use

What I can deduct (12.5% of):

• Mortgage interest: ~$1,800/year
• Property tax: ~$625/year
• Utilities: ~$600/year
• Home insurance: ~$150/year
• HOA fees: ~$375/year
• Repairs/maintenance: ~$400/year

Total deduction: ~$4,000/year

At 22% tax bracket, that saves me about $880 in taxes. Nice, but not life-changing.

And I have to pay both halves of FICA (15.3% self-employment tax), deal with quarterly estimated payments, and pay my CPA $800/year to handle Schedule C. You W-2 folks have it easier than you think.

Fair point on the self-employment tax. I make $180K W-2, so my employer is paying ~$13,770 in their half of FICA. If I were 1099 I'd have to pay that myself, which would way more than offset any home office deduction.

Still seems like there should be SOME deduction for remote workers. Like what if my employer required me to have a home office setup?

Even if your employer required it, you still can't deduct it as a W-2 employee under current law. The TCJA eliminated all unreimbursed employee expense deductions, not just home office.

Some strategies that ARE legal:

• Employer reimbursement: Ask your employer to reimburse your home office expenses under an accountable plan. They can deduct it, and you don't pay tax on the reimbursement.
• State tax benefits: A few states (like California, New York, Pennsylvania) still allow some home office deductions at the state level.
• Maximize other deductions: Retirement contributions (401k, IRA), HSA, student loan interest, etc.

The employer reimbursement route is your best bet. Many companies started offering $50-100/month WFH stipends during COVID and kept them.

I run HR for a 150-person remote-first company. We implemented a $75/month home office stipend specifically because employees can't deduct it anymore.

It's deductible for us as a business expense, and not taxable income to employees if administered as an accountable plan (meaning it's a reimbursement for business expenses, not just extra compensation).

Employees have to submit something showing they have a home office (photo, lease showing extra bedroom, whatever) but we're not strict about it. $75/month covers internet, electricity, furniture depreciation, etc.

Definitely worth asking your employer about this. Frame it as "this costs you nothing and helps retention" - we can deduct it at our corporate rate (21%) and employees value it way more than $75 in salary (which gets taxed).

The accountable plan approach HR_Director_Austin mentioned is solid. To qualify as an accountable plan under IRS rules:

1. Business connection: Expenses must be business-related (home office qualifies)
2. Substantiation: Employee must substantiate expenses with receipts/documentation within reasonable time (60 days)
3. Return of excess: Any amounts over actual expenses must be returned

If it meets these requirements, the reimbursement is not taxable income to you and doesn't appear on your W-2.

Many companies do simplified versions - flat $50-100/month without requiring detailed receipts, which technically doesn't meet the substantiation requirement but IRS rarely audits these for small amounts.

This is super helpful. I'm going to ask my manager about implementing a home office stipend. We have about 40 remote employees so it might be an easy sell.

In the meantime, what about state taxes? I'm in Colorado - any deductions there?

Colorado conforms to federal tax law, so no home office deduction for W-2 employees at the state level either.

States that DO allow some form of home office deduction for W-2 employees:

• California: Allows if employer requires it for employer's convenience
• New York: Similar to California
• Pennsylvania: Allows unreimbursed employee expenses including home office
• Alabama: Allows if employer requires it

But Colorado is not one of them. Sorry.

Talked to my manager. Good news - she escalated to finance and they're looking at implementing a $100/month remote work stipend company-wide starting Q1 2026! Apparently several people have asked about it.

Not as good as the actual deduction would be, but $1,200/year tax-free is better than nothing. Thanks everyone!