Just when you thought that you had a gripe on your taxes, a global pandemic came along and mudded things up. I don’t say that to belittle the ones who have lost their jobs or loved ones. It’s just that on top of everything else you’ve anxiety and stress over, you know have to be concerned about the tax implications of working from home. Working Remotely and Taxes are hard.
Many of us have been working remotely for almost a year now because of COVID-19 and the guidelines implemented in response. In fact, according to the U.S. Census Bureau, 37.5% of adults are said that they are living “in households where at least one adult has substituted some or all of their typical in-person work for telework because of the coronavirus pandemic.” And, despite the rollout of vaccinations, remote work is expected to persist.
Working Remotely and Taxes
There’s a good chance that filing your taxes this year, and possibly beyond, will be a little different. And, to avoid the headache of getting in trouble with Uncle Sam, here are some considerations to keep in mind as you begin your tax preparations.
Who is classified as a remote worker?
The U.S. Office of Personnel Management states that “the official definition of ‘telework’ can be found in the Telework Enhancement Act of 2010: “[t]he term ‘telework’ or ‘teleworking’ refers to a work flexibility arrangement under which an employee performs the duties and responsibilities of such employee’s position, and other authorized activities, from an approved worksite other than the location from which the employee would otherwise work.”
In practice, this is “a work arrangement that allows an employee to perform work, during any part of regular, paid hours, at an approved alternative worksite (e.g., home, telework center).” It also “includes what is generally referred to as remote work but does not include any part of work done while on official travel or mobile work.”
Other terms used to describe remote work include:
- Working from home (WFH)
- Mobile worker
Hopefully, that clears things up.
But, there is something very important to keep in mind. If you’re going to return to your worksite, then you aren’t technically a remote worker. The reason is that your official place of work is the geographic location of your employer — even if you’re self-employed and your business is not the same as your residence.
As a remote worker, where do I file my taxes?
If you meet the government’s classification of a remote worker, then where exactly would you file your taxes? The answer is actually quite simple. You will file your personal income taxes in the state that you live in regardless if you’re a W-2 employee or a 1099-NEC independent contractor.
So, if you’re a remote worker residing in California, then that’s where you’ll file. Speaking of California, it’s the state with the most amount of remote jobs at 6% of the workforce. After Cali, it’s Texas, New York, Florida, Illinois, Virginia, Pennsylvania, North Carolina, Georgia, and Massachusetts.
FYI, not all states require you to file a personal income tax return — just as long as no other state’s withholdings are listed on your W-2, writes Amy Northward, CPA. These include:
- New Hampshire
What if my employer is in a different state?
Here’s where things may get more complicated.
Let’s say that you live and work in California, but your employer is based out of Utah. When you go to report your income on your state tax return it will be filed with the California Department of Revenue.
The exception is if your W-2 lists a state that is not your residence. “In that case, you would file a non-resident return to the state listed on your W-2 form in addition to a resident return to your home state,” explains Northward.
“Don’t worry about being taxed twice,” she adds. “Your resident state will give you a dollar-for-dollar tax credit for any income taxes you have to pay to the other state.”
What if you work outside of your state residence?
Are you still with me? I hope so. Because here’s where things could get really hairy.
Here’s an example I know of from a couple of acquaintances who work in New York City. A majority of them worked from their primary residence. Primarily, this was in states like Connecticut or New Jersey.
Others actually fled the Big Apple. I knew some folks who spent a good part of 2020 at their beach house at the Jersey Shore. Others actually temporarily relocated to be closer to elderly family members in Florida or Arizona.
As you might have guessed, this could present a problem as you may end-up filing two or three state tax returns.
“You should also check the tax laws for the state in which you are planning to work in order to determine whether or not they will require you to pay non-resident taxes for working in their state,” advises Northard. “Generally, these tax laws are based upon income thresholds and time spent working in that state.”
For instance, if you’ve been in Arizona for over 60 days then taxes will be withheld. In New York, you’ll have to do this even if you were working in the Empire State for one lousy day. The Mobile Workforce Coalition is a solid resource to help you untangle this complained web.
Are there multi-state agreements?
The good news? “States often have established workarounds to help mitigate the complexity for these taxpayers,” notes CNBC’s Darla Mercado, CFP.
“For starters, some states have reciprocity agreements to keep workers’ income from being taxed twice,” she adds. “New Jersey and Pennsylvania have such an accord.” Similar agreements have also taken place “between Maryland, Pennsylvania, Virginia, West Virginia, and Washington, D.C.”
“Other states may offer a credit to soften the hit from double taxation,” Mercado writes. Connecticut is one example in that it “allows a credit to residents paying income taxes in other states — namely those who commute to jobs in New York.”
What’s more, Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania “tax teleworking employees based on where their employer’s office is located,” she continues. “This is known as the “convenience of the employer” rule, according to the Tax Foundation.”
Can I claim some sweet home office deductions?
Just because you’ve been working remotely doesn’t mean you’re eligible for a home office deduction. You can thank the Tax Cuts and Jobs Act (TCJA) for this as it eliminated the miscellaneous itemized deduction from 2018 through at least 2025.
Moreover, this has also done away with tax deductions like travel, education, and meal expenses. Other expenses that you can no longer claim are professional licensing fees, professional society dues, union dues, and tools or supplies reimbursement. However, ask your employer if there’s a reimbursement policy.
What can I do to avoid tax surprises?
If you’re still lost, and I don’t blame you, seek professional assistance from a tax advisor or professional. Because this is uncharted territory, and it can get complex, they will make sure that you don’t run into any potential tax problems.
On your end, stay on top of your taxes. For example, “make sure you and your employer are clear and in agreement on where you will be performing your work,” suggests Northard. And, you may want to study a little bit about the law if you’re working in a different state than where you reside. For instance, if you’ve temporarily moved to another state for half of 2020, you may be subject to income state taxes in both your main home state and your temporary home.
Furthermore, make sure that you’ve kept meticulous records, such as:
- How much time you spent in a given state
- When you worked
- If there were travel restrictions or stay-at-home orders.
And, one more thing from Northard. Don’t forget to “file your personal income taxes to your state of residence and report all of your income on that return.”