Working from home: what your employer can pay you tax-free

The rule: a reasonable estimate of your costs is tax-free

Money your employer pays you is normally taxed as income. The exception is a reimbursement: a payment that covers costs you actually incur because of your job. Inland Revenue says reimbursing allowances are not taxable, but if the payment is more than the employment-related expenses, the excess is taxable.

Instead of reimbursing each receipt, an employer who regularly reimburses a cost can pay a regular allowance, based on average costs and set at a reasonable amount. They do not need Inland Revenue's approval to pay one.

The costs must be extra ones, caused by working at home: power you would have used anyway does not count.

What counts: power, internet, phone and furniture

Inland Revenue's working-from-home determination, EE004, sets out what can be reimbursed tax-free. In short:

• Utilities that go up when you work at home: electricity, gas, phone and internet.
• Equipment you already own: a small amount for wear on it, which the weekly rates already include.
• New equipment and furniture you buy to work from home, such as a desk, chair, monitor or headset.

What does not count: rent, rates and mortgage interest. They are private costs that do not change because you work at home, so reimbursing them cannot be tax-free.

Inland Revenue's methods and set rates

EE004 applies to payments from 1 April 2023 and replaced the earlier determination, EE003. You may still see $15 a week quoted: that was the figure before 1 April 2023. The current amounts that can be paid tax-free are:

For new equipment and furniture there are two options. The simple one lets your employer reimburse up to $400 for new phone or computer equipment, which includes accessories such as a monitor, keyboard or printer, and up to $400 for furniture and other equipment. Each limit covers everything you buy, not each item, and it does not refresh each year. The other option reimburses the cost in proportion to work use: all of it if the item is used only for work, up to 75% if mainly for work, and up to 25% if mainly private.

The rates apply only if your work at home is more than minor, though working at the office on alternate days still qualifies. They are not the only lawful amounts: an employer can pay more tax-free if it can show the higher amount is still a reasonable estimate of your extra costs.

Asking your employer for it

EE004 sets what can be paid tax-free, not what your employer must pay, so an allowance is something to ask for and agree, ideally when your working pattern is set. At $20 a week, the flat rate is $1,040 over a year, tax-free.

If you are still agreeing how many days you work from home, raise the allowance at the same time. Our guide to making a flexible working request covers the formal route. In Your Career, you can add an allowance to your pay record by name with the date it starts, and a later entry with the same name replaces it. The demo opens a year of Your Career with no account: its pay record holds a salary, a rise and a bonus, with a pay review coming up, so you can see where an allowance would sit.

When it becomes taxable pay

A taxable allowance is added to your gross pay and taxed through PAYE like the rest of it. Four things make some or all of a working-from-home payment taxable, or take it outside Inland Revenue's set rates:

• It is more than your extra costs. The excess is taxable, and KiwiSaver deductions are taken from that excess at your usual rate.
• It comes out of your salary under a salary sacrifice arrangement, which EE004 does not cover.
• It carries on after you stop working from home, apart from phone costs you still have.
• It covers private costs, such as rent, rates or mortgage interest.

A taxable allowance is not a bad thing: it is still money. It is just worth less than the same figure paid tax-free. Working from home also changes what your office days cost; our article on the cost of a hybrid commute works that side out.

Keep the allowance with the rest of your pay