work from home Tax

For many who work from home, tax time can be one of the most frustrating, confusing and disappointing periods of the year. Presenting figures to an impersonal, uncaring and ungrateful IRS can be a real drain especially if there are questions regarding filing status, record keeping or deductions. The tax code is what it is and must be dealt with. Hopefully in a manner that lessens the depth Uncle Sam dips into your pocket.

Depending on the size, scope, purpose and direction of a WHB, the proprietor will need to untwist some uncertain puzzles when filing. Right at the top of the list are strategies to avoid an audit. As counterproductive as it may seem; or an abuse of resources and a sort of “throwing the baby out with the bathwater” mentality, the IRS will conduct audits on the most inconsequential small businesses for the most insignificant reasons. An audit is very intrusive, takes away valuable time and goodwill and if records are not in precise order, can cause big-time, lasting headaches. So the best strategy is to take measures to avoid an audit.

The IRS uses a rubric outlining certain patterns and statistics when examining returns, some which arouse additional scrutiny. These crimson flags may then direct an IRS agent right into a WFH living room, so a filer should be aware of some of the things that set off alarm bells. For individual filers itemizing deductions, a schedule C must be attached. For small business, especially the home office type, the IRS likes to scrutinize schedule C returns. They are looking to find personal expenses disguised as business expenditures. Regardless that everything is above board, the IRS could demand to see receipts, documentation, tickets or anything else under the sun; and who needs the hassle? Therefore, it may make sense to file as an S corporation where there is much less of a chance of an audit.

S corporations are a partnership arrangement and do not pay income tax. The corporation’s profits or losses are split between shareholders, who then report that income or loss on individual returns. This is popular with many WFH businesses because spouses and other family members are automatically regarded as single shareholders. Another advantage of an S-Corp. is that the shareholders are protected from liability much like a general corporation. Additionally, filing home office deductions as an S Corp. are much less likely to trigger an audit than if attached to a form 8829 on a 1040 which would be mandatory procedure with an individual return.

Requirements for filing as an S corporation include terms that are easily met with a small WFH including issuance of only one class of stock and not having more than 100 shareholders. Interested parties can be taxed as an S Corp. by filing Form 2553: "Election by a Small Business Corporation" [4][5] with the Internal Revenue Service (IRS).

Other things that help prevent the IRS from singling out your return are just common sense, housekeeping, spelling bee-type practices. Yet they are overlooked at times and then come back haunt the filers and match his or hers chagrin. Simply, be certain that then math is done properly and completely and that it is entered on the correct line of the return. Little errors like that jump out at hungry IRS examiners. Also, when rounding figures try and avoid entering whole number ending in a lot of zeros like 40,000 or 6,000. These little things have a way of developing into big problems.