Tax deductible business expenses for contract employees Best answer on the web
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07 30th, 2010 in
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company in another state; working through an agency. As the company
is located in the East and I my residence is in the Midwest there
would be considerable expense involved in flying to and from work
location (weekly), maintaining a second residence near workplace
(extended-stay hotel or apartment) and possibly renting an automobile to commute from second residence to workplace. My question is what part of the abovementioned expenses would be tax deductible and would these
deductions be available under a W2 and/or 1099 contract arraignment.
1. Negotiate with the prospective employer to get reimbursed for your housing and transportation expenses. This obviously doesn't allow you to take deductions, but it does mean that your flight(s), car rental and hotel would be covered. Your meals may not be reimbursed, but ultimately, you need to feed yourself regardless of whether or not you're working for the company.
In theory, your prospective employer should be happy to do this so long as their expense policies are based on an accountable plan (ie: you need to submit expense reports with receipts, etc.). The reasoning behind this being that if they reimburse you for reasonable business expenses, the reimbursement may be deductable on their business taxes. At worst, they've budgeted for expenses if they're looking to hire an out-of-state contract employee for any significant length of time.
The benefit to reimbursements is, of course, that it somewhat simplifies your taxes at year end, and while you will be expected to cover your own costs out of pocket, the employer will reimburse you for reasonable expenses such as transportation and housing.
2. Pay for all of it out of pocket and negotiate a higher rate of pay to cover the expenses. This allows you to take deductions for most of your expenses, so long as you're staying at a hotel and *not* a second residence.
A second residence would almost certainly not be considered a business expense for tax purposes and shouldn't be taken as a deduction. However, if you stay at a hotel/extended-stay, it would almost certainly be considered a temporary residence for business purposes, wholly separate from your primary residence.
There are two important things to remember if you're looking to itemize at year-end. The first is that while you could theoretically deduct meal expenses, I would strongly advise consulting with a CPA versed in tax regulations prior to doing so, as the arguement could be made that your meals are not a business expense.
The second is that if you're renting a car, you cannot deduct milage as a business expense. The reasoning behind this is that mileage can only be taken as a deduction to offset the expected costs of maintenance and fuel for your personal vehicle.
Now, if you were going in as an employee (W-2), your employer is required to reimburse you for reasonable expenses. If you are going as a temporary employee who will receive a W-2, you'll want to be more cautious about saving your receipts, as many companies scrutinize their employees' expense reports more closely than those of contractors. As above, if you are being directly reimbursed for your expenses, you cannot deduct them at tax time.
Regardless of whether you'll be a contractor or an employee, keeping good, clean/clear records of your business expenses is an excellent habit to get into and will make the accounting staff reviewing and/or entering your expenses happier, which in turn will often see your expense check in your hand a couple days sooner. Further to that, if you're planning on taking itemized deductions at tax time, you need to be prepared for the highly unlikely, but not unheard of possibility that you will be subject to an IRS audit. If you are audited and cannot fully document your business expenses, you may end up with a tax assessment that nearly equals the amount of the additional income, when penalties and fines are added.
Ultimately, if the company is willing (and they should be), reimbursement of your reasonable expenses is the better way to go; it will cause you fewer headaches at tax time (if you're doing weekly, or even semi-weekly expense reports, that's a very large stack of paper to wrangle) and get the money back into your bank account faster.
Are you trying to find out whether these expenses are deductible to you or to your employer?
--keystroke-ga
If you want to take travel expenses, you may only deduct the amount it would have cost you to stay out east instead of going home. (Hotel room, food) Thus, if it costs you $500 to fly home & would only cost $300 for hotel & food, you may only deduct $300.
Depending on where you are located, you can deduct actual meal expenses or $39-64 per day.
Would you be able to alternate weeks at work & home? Or work 10 days on 4 days off?
Consult a tax pro before finalizing negotiations. S/he can also give you guidance on what receipts/records to save for next year.
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