What Are the Tax Implications of Working Remotely?

Many Americans who have been working remotely don’t know state-by-state tax laws, which could mean they’ll be hit with an unexpected bill. Here’s what you need to know.

Key takeaways

• Americans working remotely might have to pay more taxes if they worked in more than one state
• Other tax implications for some remote workers include work-from-home tax deductions, like the home office deduction

Over the last year, businesses of all sizes shifted to remote work environments, and more employees telecommuted than ever before. Many companies have realized that remote work has its own set of benefits, and the trend isn’t going to go away anytime soon.

Of the American workers whose jobs can be done remotely, 71% have worked from home over the last year. More than half of those remote workers say they want to continue working from home, even after pandemic restrictions are completely gone.

While working remotely has perks, there are a few tax implications to be aware of. It’s not always easy to understand whether you can take the home office deduction or work in other states without making changes to tax withholding or paying more.

Here are some important points to consider if you’ve been working remotely and are trying to prepare your taxes.

Remote work in a different state

First, let’s talk about what happens when you work remotely in a different state from where the company offices are located. Each state has laws about how remote work is handled. Unfortunately, almost half of remote workers (47%) surveyed by the Harris Poll for the AICPA said they aren’t aware that each state has its own remote-work laws.

There could be significant consequences if taxpayers don’t change the state withholding taxes from their paychecks to reflect where they actually worked. If taxpayers didn’t change their withholding by the end of 2020, they could have a more significant state income-tax liability this year.

For instance, because each state’s laws vary, people who have worked in several different states this year may face a variety of filing requirements or tax liabilities.

Each state outlines the period worked there to be liable for state income taxes, including from one day of work to 60 days. Many states also have rules for when you are considered a statutory resident of the state. If you have lived in a state for usually more than 183 days, the state will require that all of your income is taxable, so you could face dual taxation if you are found to have dual residency.

There was some government focus on these matters after the pandemic, with proposals for the Remote and Mobile Worker Relief Act being part of the Senate’s COVID-19 relief bill. This legislation would create a national standard for employees working in different states than business offices, including a 90-day grace period for working in a state before an employee is subject to its tax liability. However, this proposed bill has yet to gain much traction.

If you have worked remotely in a different state than where your company’s office is located, make sure you research state and local laws to ensure you don’t get hit with a surprise tax bill. Note that your federal taxes will likely not be impacted based on the state you worked in. 

Deductions for remote workers

Other significant tax implications for remote workers are related to the work-from-home deductions you can take. Let’s walk through a few of them:

1. Home-office deduction

You may think you’re able to claim the home office deduction if you use a space in your home for work. But it’s only available to some workers. If you are a regular W-2 employee, you can no longer take this deduction, as it was eliminated as part of the Tax Cuts and Jobs Act.

Self-employed individuals who use their home office exclusively for their business—and use it regularly—can take the home office deduction.

2. Business expenses

Independent contractors can also write off many of their business expenses for working from home, including:

• Equipment or supplies used for business
• Utilities costs (internet, electricity, cell phone)
• Depreciation on assets
• Health insurance premiums
• Business meals
• Travel costs for travel lasting longer than a workday and requiring that you stay somewhere to rest
• Use of a vehicle for business (mileage, depreciation, insurance, gas, oil changes)
• Business-related subscriptions
• Business insurance
• Rent expenses
• Some retirement contributions
• Advertising costs
• Business startup costs

Again, these expenses may only be deducted by self-employed individuals, not most regular W-2 employees. However, some employers are assisting their remote workers with stipends related to these costs.

3. Qualified business income deduction

A significant deduction available for qualifying businesses in 2020 is the qualified business income (QBI) deduction. This benefit is for small business owners or self-employed individuals and is up to 20% of QBI. The income limit is $163,300 for single taxpayers and $326,600 for joint filers.

Sole proprietorships, partnerships, S corporations, and LLCs may be eligible to take this deduction. Qualified income includes your business’s net profit but excludes income earned outside the U.S., some guaranteed payments, dividends, capital gains or losses, and interest income.

Many small business owners and self-employed workers who are working remotely may qualify for this 20% deduction, so ask a tax professional for more details. 

Work with a tax expert from Provident CPA & Business Advisors

If you have shifted to a remote-work environment this year, make sure you know if there are tax consequences or if you qualify for work-from-home deductions. The tax professionals at Provident CPA & Business Advisors are ready to walk you through your potential obligations and credits. We help our clients pay the least amount of tax legally possible and clearly explain how changing laws and regulations apply to their situation.

Contact us to learn more about our tax planning services for business owners and individuals.