Are Virtual Assistants Tax-Deductible: Here’s How the IRS Classifies Them

Having a business is stressful in many ways. But the real stress strikes while dealing with taxes. Hiring a virtual assistant makes the tax scenario even more complicated. But is it really a complex process?

If you think so, you might change your mind after reading this article. We are here to make sure you understand all the crucial requirements and processes of ensuring a VA tax deduction in the simplest way possible.

Just follow our footsteps, and we’ll help you step out of all your confusion regarding VA tax deductions. 

IRS Guidelines on Business Expense Deductions: What Qualifies?

While dealing with taxes in the US, you hear a lot about the IRS. So, what exactly is it? The IRS, or Internal Revenue Service, is the authority that regulates the US federal tax return laws. 

The IRS allows the business expense deduction of costs considered “ordinary and necessary” for the industry. 

Here, the ordinary costs refer to the everyday office expenses carried out by most business owners along the same line. On the other hand, the necessary expenses are inevitable in running a business and maintaining stable business growth.

Therefore, any ordinary or necessary cost of a business can be expensed and counted as tax-deductible. However, some expenses are partially tax-deductible, while others are fully deductible.

Can You Deduct Virtual Assistant Services from Your Taxes?

Whether or not you can deduct the virtual assistant services from your taxes can be a bit confusing initially. It basically depends on the services and contexts in which a virtual assistant is used within a business.

For a virtual assistant to be tax-deductible, his services must be directly aligned with the business. Moreover, every expense related to the virtual assistant must be relevant and significant to the improvement and operations of the company.

Again, a company’s expenditure on the virtual assistant has to be standard and fair compared to the market value of similar businesses and services. Every payment and service by the VA is required to be documented as evidence to justify the expense.

If the VA is an independent contractor, the expenses are typically reported on IRS Form 1099-NEC if the total payments to the independent assistant exceed $600 in a calendar year.

Virtual Assistant Services Classification: How the IRS Views Them

The employment status and responsibilities of the virtual assistant are the pointers used to classify them. VAs can be classified mainly into two categories: contractual/ self-employed workers or employees of the company.

IRS and other government bureaus like the Department of Labor (DOL) provide specific guidelines to categorize the workers of a company. 

For each category, there’s a different IRS form. So, as an employer, your first duty would be to identify the category of your VA. After that, you can proceed with the particular VA tax deduction procedures.

If your virtual assistant works with you on a contractual basis, he will be considered an independent contractor or self-employed. 

In this case, your payment to the VA for the service would be tax-deductible as a relevant business expense. Moreover, all your business-related expenditures related to the VA, such as communication tools or software, will be included in the deduction.

Again, suppose your virtual assistant is hired just like all other employees in your company with a fixed monthly salary and other benefits. In that case, these salaries and benefits will be tax-deductible.

Any equipment they use for their service as an employee will also be counted within tax deduction. You, however, would have to pay or withhold Social Security, Medicare, and payroll taxes on the employee’s behalf.

Employer tax deductions or credits, such as the Work Opportunity Tax Credit (WOTC), may as well apply to you. Besides that, don’t forget about the unemployment insurance and state tax that an employer must pay as per the state the employee lives in.

Proper Documentation for Virtual Assistant Tax Deductions

By now, we believe you have identified the category of VA serving you and the taxes you’ll have to pay accordingly. So now, let’s get deeper into the next step for VA tax deductions, which is the required documentation. 

• Form W-9: This is applicable for both types of VAs. The form is required to collect the virtual assistant’s tax identification number (TIN). The TIN can be the Social Security Number (SSN) or the Employer Identification Number (EIN) that the VA needs to fill out before starting the job to report his valid and accurate income on your tax return.
• Form 1099: You are obliged to file this form if you pay your contractual VA more than 600 US dollars a year. This form is one of the most critical documents to highlight the total amount paid to the VA by the employer and the total taxable income made by both the VA and the employer in a year.
• Form W-4: If your virtual assistant is an employee, you’ll have to ask them to fill out this form to show the amount of tax to be withheld from their paycheck. Through this form, you’ll also get the SSN of your VA, which is required to report their total income on your tax return. 
• Form W8 BEN: As a remote worker, a virtual assistant might not necessarily be from the US. In fact, a vast number of VAs are from countries outside the USA, serving the US companies virtually. So, how do you document the tax deduction of such a VA? That’s where this form is required. The form W8 BEN is obliged by the IRS for residents outside the USA earning from US establishments. Other than that, you might also have to comply with the laws of the country in which your VA lives. 

These were all the necessary documents that you’d need to ensure a VA tax deduction. Filling them out honestly and accurately will help you remain compliant with the US federal tax laws and stay safe from penalties and fines.

Step-by-Step Guide: How to Claim Virtual Assistant Expenses on Taxes

We have already gone through the most crucial step required to claim virtual assistant expenses on taxes. That is, understanding the category of your VA and the necessary documents in line with that. 

Now, let’s take a walk through the main steps to be followed to claim a VA tax deduction:

Step 1 – Preparing and Filing the Required Documents: As per the category of your VA based on IRS and DOl instructions, prepare the files and reports as needed-

Independent Contractor: When your VA is working with you on contractual terms, their income should be filed on Form 1099-NEC.

Employee: If your VA is an employee of your company, you will have to withhold taxes and provide a W-2 form.

Step 2 – Maintaining Detailed Records: Keep accurate records of all your payments and expenditures on the VA that are relevant to your business. You have to document the amount of the fees, the dates they’re cleared, and the services taken in return accurately in detail. 

Step 3 – Using Necessary Software and Spreadsheets: Proper and well-organized recording is pivotal for correctly filing taxes. So, you can maintain a bookkeeping/ tax software or spreadsheet to ensure all your VA and office expenses are organized and well-documented.

Step 4 – Identifying Deductible Costs: Stay aware of the VA payments counted as deductible. Not all expenditures, fees, or services to/ by your VA are relevant to a tax deduction.

Any personal task or running errands that is not a business activity can’t be considered within the tax-deductible virtual assistant services. 

The expenses must be directly related or necessary for your company. In case you’re paying your VA via a third party or online platform, you need to keep the platform fee in mind as well.

Step 5 – Keeping Supporting Documents and Proof: Always make sure to save the receipts, invoices, and contracts of all payments, transactions, and deals. This is necessary to back your tax claim.

Step 6 – Seeking Help From a Professional: You must ensure you fill out all the forms correctly and honestly. If you struggle with understanding the complexities of tax regulations, you can get help from a tax professional during the tax season to avoid any kind of blunder in filing your VA tax deductions.

Avoid IRS Red Flags: Common Mistakes When Claiming Virtual Assistant Expenses

Now that we’ve guided you this far, it becomes our responsibility to ensure you don’t fall for the common mistakes that most employers make when claiming virtual assistant tax deductions. 

Below, we’re narrowing down some of the most common mistakes:

• Misidentifying the VA category is one of the most predictable and common issues. When an employer misclassifies the category of the VA, they are often penalized with legal consequences or fines.
• Not keeping proper and detailed records of all relevant expenditures and business transactions. Or not being honest about the amount of expenses made.
• Filling out forms inaccurately or misunderstanding the purpose of the form. Many times, due to a lack of proper understanding of the IRS forms, employers mistakenly fill out forms meant for the employees.
• Not discussing or being transparent about the taxes with the VA. Or not being mindful of the laws of the state or country where the VA lives.

Conclusion

Now that you’ve learned the entire process of VA tax deductions, does it still feel complicated? Not as much, isn’t it? Every new step in a business involves a few more steps that business owners usually aren’t familiar with at the beginning.

When it comes to tax deductions, the key to doing it right is to keep track of all expenditures properly and document them as the law requires.

Once you do it right, it will get easier from next on. Any help needed? We’re always here for you. No worries!