Since the onset of the pandemic, more than half of U.S. employees have worked remotely at some point. While remote work can be appealing due to increased flexibility, lowered transportation costs, and potential tax advantages, there are also tax implications that must be considered. As many employees continue to work from home, 2021 taxes may be more complicated than expected.
Workers generally pay taxes in their state of residence, which can sometimes be advantageous for employees who live and work in different states. But, as employees have moved to lower tax states due to working remotely, some states have enacted policies to recoup lost tax revenue. One of these policies is the convenience rule, which requires workers to pay taxes in the state where the employer is located, regardless of where the employee lives. This rule already applies to companies based in Connecticut, Massachusetts, New York, Pennsylvania, Delaware, Nebraska, and Arkansas. Remote workers in these states may end up with a higher tax liability, paying in both the state of work and residence.
Additionally, employees who traveled while working remotely may also be responsible for paying taxes in any state where they lived for a certain time. Workers who travel for an extended amount of time need to make sure they are aware of any tax policies in the states they visit.
Tax Planning
Tax planning is an important way to offset the possibility of paying taxes in multiple states. One way to plan effectively and avoid paying additional taxes is to formally establish an office for telecommuting.
Under the Tax Cut and Jobs Act of 2017, miscellaneous itemized deductions that would have been used for work items were eliminated for employees, but independent contractors and self-employed individuals can still utilize some deductions for business expenses.
Another important step for remote workers is to understand the state tax codes for each state as well as any credits that are available when paying taxes in those states. Additionally, workers should ensure that they have elected the correct state withholding to avoid surprises come tax time. Each state is different so it may be necessary to seek help from a tax professional.
If you have questions about tax implications of remote work or other tax issues, contact HFM today. Our tax professionals are well versed on the latest guidance to provide our clients with professional, personalized services.