Remote work was already an increasing trend before COVID. But the pandemic thrust countless workers from traditional offices into their homes. If you are one of the lucky ones who will have the option to continue working remotely indefinitely, it's important to consider the tax implications when working remotely.
Many people want to know, “If I work remotely where do I pay taxes?” That becomes an even bigger question if you work across state lines from an employer or maintain dual residency. Continue reading to learn more about the tax implications of working remotely.
In this Guide:
Working Remotely Tax Implications
The tax implications of working remotely vary depending on where the office was and where you work now. If you work remotely in the same city and county, you probably won't have any changes to your taxes.
But things get more complicated with taxes while working remotely when it takes you into a different tax jurisdiction. Each city and state has its own rules, and we can't cover them all here. However, the following are the most common working remotely tax implications to know about.
1. Income Tax
If you work in the same state as your employer, your income tax situation probably won't change. But if you start working remotely full-time across state lines, you may have to file and pay tax in two states.
Some states don't have an income tax, but most do. And employers may have to pay certain taxes in multiple jurisdictions if employees work remotely in different states. Having a single employee in a state may create a “tax nexus.” That's a term referring to a business that has operations in a state and has to pay tax there.
Income tax includes investment profits. So investors who make a portion of their income outside of work should pay even closer attention.
2. Dual Residency
If you live with dual residency — where you spend a portion of the year in different states — you have another tax issue to manage. You may have to pay income tax to two states, which may lead to expensive tax bills. Many who live in metro areas on state boundaries already have to deal with this. These areas include New York, Philadelphia, and Kansas City.
In general, there is a common 183-day rule used to calculate residency. If you live in a state for 183 or more days per year, you are likely considered a resident for tax purposes. You have to pay full income tax on all annual income in some states if you are a resident. So be careful about how many days you spend at your vacation home or any other location while working remotely.
Some states offered COVID-19 waivers or exceptions. But you should check your states' rules if you're a dual resident, since not every state did.
Changing Your State of Residency
If you want to change your domicile for tax purposes, it may not be an automatic process. Some states look at your voter registration, vehicle registration, driver's license, or other documents as evidence of your primary residence.
Those who can move their tax residency to a lower-tax state — or one with no state income tax at all — could save thousands of dollars per year on taxes. If you have doubts about your situation, contact a tax professional who can guide you on where to pay taxes.
No matter where you live in the U.S., your income is probably subject to federal income tax. You may be able to lower your federal income tax and perhaps your state tax by claiming deductions related to working from home.
Home Office Deduction
Full-time workers may be able to claim the home office deduction. This deduction allows you to claim a portion of your home's costs as a work-related expense, which lowers your taxes. There are a couple of ways to calculate this. You can use actual costs or an estimate based on the percentage of space in your home.
However, most people won't qualify, as there are stringent rules around using the home office deduction. The two main requirements, according to the IRS, are:
- Regular and Exclusive Use, and
- Principal place of your Business.
Most people use their home office regularly but rarely exclusively. If it doubles as a guest room, storage, or anything else, you can't claim the home office deduction.
Because this deduction requires abiding by strict rules, many people who are unsure opt to skip the home office deduction.
Unreimbursed Job-related Expenses While Working From Home
Even if you can't take the home office deduction, you should keep close track of any work-related expenses that won't be reimbursed by your employer. You may be able to deduct these from your income for tax savings.
There are specific rules about what you can and can't deduct. So it could help to read the IRS resources on the topic. When working at home, you may, for example, run into costs for office supplies or printing that won't be reimbursed. Those types of expenses may qualify for the unreimbursed employee expense deduction.
It's Okay to Get Help When Your Taxes Get Complicated
Most people can do their own taxes by using popular online tax software. This even includes those with dual residencies, remote workers, or those who are simply looking to maximize their deductions.
However, if you're worried about making mistakes, it may be worth it to upgrade or hire an expert. Audits, back taxes, and penalties can be expensive and a huge hassle. Keep in mind that while some tax software companies only provide DIY tools, others like H&R Block are able to offer help from live tax pros as well.
What's most important is taking the time to understand your state's rules and whether you have to file in two places. But that shouldn't discourage you from working remotely. It's a great lifestyle and likely a big part of employment in the future.