StartThis Idea #16: A unique approach to home office reimbursements
Reimbursing employees for their home office spaces should be much easier, and suck less at tax time
A web application for companies to easily manage and distribute reimbursements for work-from-home employees who have home offices.
Categories: Expense management, remote work, tax/compliance
Skills required: Simple web app development, basic knowledge of personal and corporate tax laws
The Pitch & Background
If a company is in an office, managing expenses and equipment purchases is easy: you lease some space, and buy the stuff workers need to do their job - done. When employees are working from home, this is not as straightforward.
If a company wants to provide an allowance or reimbursement to an employee for home office expenses, they need to track that carefully, and ensure they are aware of the tax implications where each employee lives (each state/province or country is different). There are many scenarios where an allowance can be deemed a taxable employment benefit, at which point, an employee will likely get slapped with a significant tax bill at the end of the year.
If the tax stuff seems trivial, consider that the CRA (Canada) has frequently audited tech companies who provide free lunches in their offices, and handed employees sizeable tax bills after determining they had received a taxable benefit. Tax agencies are not above sweating the small stuff.
The solution here is a platform that makes it easy for companies to manage this, and creates the necessary paper trail to keep the accountants happy.
Employers can create simple allowance and reimbursement policies, and the platform manages the distribution of the funds to workers.
Office space and utilities reimbursements provide a particularly unique opportunity here. I am not an accountant, but there are basically three ways an employee can get reimbursed for their home office (in the US or Canada):
Company provides employee with an allowance - a fully taxable employment benefit. Employee can claim a limited amount of expenses back at tax time if they meet certain criteria.
Employee claims a home office deduction with no reimbursement from company. They can only claim this if they meet certain criteria, but most salaried, non-contract home office workers do not.
Company actually rents the space in the employee’s home. Employee must claim the rental income, but can also expense much more liberally. A portion of their mortgage interest or rent, utilities, insurance, and even repairs may be claimed against this income, just like any rental.
Every company doing expense management right now focuses on #1, which often leaves the employee exposed to a tax liability. Employees are on their own for #2. But the most advantageous way to do this - which no one is doing - is #3. There is no tax withholding requirement or payroll deductions required, and there is no chance any employee gets anything clawed back at tax time. It’s a standard rental agreement. It also doesn’t matter if an employee is only remote part-time - the treatment is the exact same (commonly, for an employee to claim a home office deduction, they have to work from home exclusively).
In its simplest form, an employee could just enter all of their expenses, and an estimate of the square footage of their office and overall property. The reimbursement amount paid by the company is calculated from this (% of space used for office x total expenses), and is net zero tax situation. The employee just enters a couple extra lines on their tax return. No tax has to be withheld upfront.
The platform would handle a basic rental contract that is tied to employment, and be an intermediary for the fund distribution.
This takes all the heavy lifting off of the employee and company, and guarantees the best possible tax treatment for these types of expenses. Wins for everyone!
Strategy & Execution Notes
From a product perspective, this shouldn’t be too difficult to get started. At its core, you really only need a way for a company to enter employees, create an allowance policy, and track payouts. And even that could be done manually to start. The more you can run this as a service to start, the better.
Small or medium sized tech companies with remote employees are the main market here. The company I work with (HigherMe) would be interested, if you want to chat about doing this for us. I’m sure you could also scout through reddit, twitter, and some Slack groups to find founders/HR folks asking about how to manage this for employees. Reach out and have some conversations. Figure out the objections, and the stuff people don’t want to deal with. Hone your MVP from that.
The key differentiator is that your platform will manage a basic office rental contract between employers and employees (or possibly your company is the renter, and the employer has a separate agreement with you). A lawyer would be a good idea here. It shouldn’t be too complicated - this is no different than a roommate renting a room - but it’s still a good idea to make sure the wording is airtight.
You should be able to start charging for this right away. A subscription per employee makes the most sense. Later, if you add payments, you would want to include a % fee to cover payment processing costs. Other revenue opportunities can be added on later. Naturally, if you are managing the biggest employee expense item, you will likely be able to get adoption for managing smaller, non-recurring expenses like equipment and supply purchases. Most of the current options out there are not well-suited for remote workers.
Though no one is currently doing this (from what I could find), it may not be hard for other platforms to rip this off and add something like this as a feature. The key, I think, is to move quickly, and also really nail the focus on remote workers. There are likely many other opportunities here to explore. Can an employer create a corporate account with an internet provider to get a better rate on internet for all employees? Is there an easier way to help companies manage the expenses for their team’s in-person meetups and retreats? What other expense management features can you add?
Once you’ve put together a clear product offering, back all of this up with good content marketing. Many employers may not realize the way they are currently managing expenses and allowances could create bad tax situations. Many home office workers are also unaware of what they can (and can’t) claim on their taxes for expenses, or how to optimize this. Webinars and supporting blog content are low/no cost, and are an easy way to build reputation and generate leads.
Lastly, in writing this StartThis, two other startup ideas emerged around remote work. I will be releasing those as #17 and #18 in the next couple weeks. There is likely an opportunity here to combine a few of these ideas to make a more comprehensive product, that can compete for the long run.
Data & Research
More than 80% of companies leaders plan to permit remote work after COVID.
22% the American workforce will be remote by 2025, according to a study conducted by freelance platform Upwork.
More remote companies are adopting policies to reimburse employees for remote work expenses, and this will likely become standard practice in the next 5 years.
Name Ideas
Flexpense, RemoteReimburse, Hoffice, FutureOffice
I hope this one got you thinking, and maybe inspired to work on an idea! If you’d like, let me know what you think of this idea: