As the coronavirus pandemic spread, large numbers of workers switched to working from home. COVID-19, which continues to plague our country, will continue. Many employers have announced plans to allow employees to work remotely permanently.
According to self-reported data, employees are not only supportive of the move but also happy with it. According to McKinsey‘s recent research, 80% of respondents reported that they love working from home. 41% said that they feel more productive working from home while 28% stated that they are equally productive.
This could impact your tax situation if you’re part of a workforce that has moved to remote work temporarily or permanently. Here are four tax considerations for remote work:
1. Income taxes
There is no tax impact if you live in the same state as you file your taxes. If you work from home and are not in the same state as your previous job (i.e. You may have to pay tax consequences if you cross state lines in order to get to work.
Federal income taxes will not be affected. For state taxes, however, income tax is affected by where your remote office and employer are located. This could lead to additional tax burdens.
Tax nexus is when someone lives or works in a state. Nexus refers to a link between the taxing authority, the entity that has to collect or pay the tax.
A business’s physical presence is a key factor in tax nexus. Tax nexus can be achieved by having employees who are physically located in a state even though they work remotely.
Many states have indicated that a telecommuting worker who isn’t engaged in sales or has no contact with customers in-state would still trigger the out of-state employer income tax Nexus in the state where the employee is located.
This means that the remote home of the employee could be considered an office, and the employer would be subject to tax nexus in the state. The employee could also be subject to income tax in the remote state.
This issue was a hotly contested one before COVID-19. While some states grant COVID-19-related exemptions for a certain period of time, others do not. Due to the pandemic, states are starving for tax revenue dollars and there will be an increase in tax nexus disputes in the near future.
2. Dual Residency
A “resident” is someone who is present in the state for any reason other than temporary or transitory. Most states define it as a person who is there for more than one purpose. States consider a person’s “domicile”, the permanent residence to which they intend to return if they are absent for a certain period.
If you have lived in the state for more than 183 consecutive days, this is considered residency. You may also be considered a Statutory Resident if you’ve lived in the state for longer than 183 days. This threshold could be increasing for many who moved to another state because of COVID-19.
Why is this important? The crossing of the 183-day threshold can lead to dual residency and possibly dual taxation. If an individual is believed to be a resident or domiciled in a state, most states have the right to tax their income. A state may tax 100% of the income of residents from any source, including portfolio income. The state’s income tax rules will determine the extent of taxation.
3. Changing your State of Residence
If they have been relocated because of COVID-19, many might think about changing their state. It is important that you follow the rules of your state for changing your residency if this applies to you. States do not consider you to have moved domicile unless certain conditions are met. You may need to update your voter registration, address and driver’s license. Residency audits are increasing so make sure you keep all documentation.
You should consult your employer if you work remotely in a different state to your home state. You should also consult your CPA or financial planner, as tax issues in state taxes can be complicated depending on the situation and the states involved.
Home Office Deduction
Tax Cuts and Jobs Act (TCJA), which suspended the home office deduction of W-2 employees in tax years 2018-2025, has been passed.
Self-employed individuals who use their home for business purposes “regularly” and “exclusively” during tax year are not eligible for the home office deduction. You must use a part of your home exclusively for business purposes. You can deduct the cost of an additional room that you use to run your business by taking a deduction from your home office.
There are two ways to calculate the deduction if you qualify: the simplified and the actual methods.
The simplified method allows taxpayers to calculate their home office deduction using the following formula: multiply your business square footage by $5 per sq foot. This should not exceed 300 square feet.
The actual method allows taxpayers to calculate the possible deductible amount by dividing their business expenses.
When working from home, you may incur job-related expenses
The TCJA abolished all miscellaneous itemized deductions from 2018 to 2025 subject to the 2% limit on adjusted gross income (AGI). This includes the deduction for unreimbursed employee costs.
But, make sure to check the reimbursement policy of your employer. You may be eligible for full reimbursement or you may be able trade your salary reduction to get reimbursed. If you meet certain criteria, your salary is fully taxable. However, the reimbursement of expenses is exempt from tax.
The pandemic has undoubtedly disrupted our lives and forced many to work remotely. If you are one of these individuals, consult your financial planning professional to discuss any state income tax issues or financial planning concerns.
Where to file your taxes
Simply put, personal income taxes must be filed in the state you live in, regardless of whether the employer you work for is located in another state. This applies regardless of whether you are a regular W-2 worker or an independent contractor (freelancer). Your domicile or resident state is the state where you live, and are legally allowed to do so.
This applies to all workers, even remote ones. The United States Office of Personnel Management provides the following definition of remote working: “Long distance telework, also known as remote work, is an arrangement where an employee works most of the time from another geographic area. This can impact your ability to file taxes.
Employees who are temporarily working remotely due to the COVID-19 pandemic do not qualify as remote workers, even if they are expected to return to work at some time. If you are currently in such a situation, you won’t be considered remote worker for tax purposes.
What are the requirements to file taxes in two states?
If you work remotely, you will only need to file and pay income tax in the state you reside in. In some cases, however, you might be required to file tax returns for two states. It all depends on your individual situation, the tax laws in the respective states, and the company you work for.
Let’s begin by delineating two terms and clarifying the differences between them: a resident and non-resident state. The resident state, as mentioned, is where you live and maintain permanent residence. This state taxes all income regardless of where it was earned.
Non-resident states are those where you have not lived in the last year. While non-resident income tax laws can vary from one state to the next, if the state you are not listed on your W-2 form then you will likely need to file a return for non-resident status tax.
If you reside in your resident state but your W-2 list lists the non-resident state, you will need to file two tax returns. One for each state. You will be double-taxed but not necessarily pay twice the tax. If you reside in one state and work in another, you will typically receive a tax credit from the resident state for the taxes paid by the non-resident state. This allows you to avoid double taxation.
Some states have agreements with neighboring countries that reduce double taxation of non-resident workers. New Jersey, for example, has a reciprocal personal tax agreement with Pennsylvania. This means that residents of New Jersey who work in Pennsylvania are exempt from the state’s income tax.
Sometimes, people find themselves in situations where their employer is located in one state but they live and work in another. You might work remotely for an employer in California, have a home in Oregon, and then go to Idaho to take care of a relative who is sick. Then you continue to work while you are there. This situation can make things more complicated.
To determine the best course of action, you would need to review the tax laws in each state. To continue with the previous example, you would want to review Idaho’s tax laws in order to determine if you are subject to nonresident income taxes during your time spent in that state.
States with no income tax
You don’t need to file a resident return if you reside or work in certain states that don’t tax income taxes. If you live in any of these states and do not have any non-resident states on your W-2, you don’t need to pay state income taxes.
- New Hampshire
- South Dakota
These nine states all have income tax exemptions, but most require residents to file tax returns. Keep in mind, however, that you will still need to file a tax return even if your W-2 forms show that a state that charges income tax is in existence.
You don’t want any penalties if you file your taxes. Research the tax laws of your state and any other states you live in carefully. If this sounds overwhelming, you might consider professional assistance with income taxes.