Remote work continues to be commonplace amid the coronavirus pandemic, which experts say has only served to speed up the trend of increased teleworking. Remote work is often appealing to employees seeking more flexibility, but in some cases remote work can also offer tax advantages alongside reduced housing and transportation costs.
In April 2020, 69% of U.S. employees worked remotely some or all of the time, and one year later, that portion was still sizable at 51%, according to a Gallup poll. With a large portion of the U.S. workforce still working remotely and a recent uptick in relocation and job hopping, the 2021 tax season is shaping up to be complicated for many.
For now, many of those remote workers can save on taxes by relocating to low-tax states. But the taxation of remote workers is still a new and developing issue as states become more aggressive in their taxation of nonresident workers based on employer location.
“States are still playing catch-up to preserve their revenue streams,” says David Danic, director of tax services at Summit CPA Group in Indiana. “Most states are still in a relative standstill based on pre-pandemic rules, though there were some temporary rules that allowed more remote work, and I believe states are going to start trying to pick up more revenue based on where the employer is located so they’re not losing all of those employees that used to be taxed in that state.”
Remote Work and the Convenience Rule
As a general rule of thumb, workers pay income tax to their state of residence. This can offer great advantages to the city dwellers migrating to suburban or rural areas who can take advantage of their company’s work-from-home policy and relocate to a low tax state.
For example, if a taxpayer who lives and works in Washington, D.C., where the maximum individual income tax rate is 8.9%, opts to work remotely from Wyoming, where there is no state income tax, the taxpayer avoids the income tax altogether.
However, as remote work becomes more popular and taxpayers migrate, states are seeking ways to recoup that lost revenue — and instead of saving a bundle, some remote workers will end up paying taxes in two states instead of one, possibly doubling their tax burden.
Remote workers whose companies are based in in seven states will incur a tax liability in their state of residence as well as in the state in which their company is located due to convenience rules. These include Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania.
In these states, the worker need not ever step foot in the state where their company office is located to generate this tax liability.
“When you get multiple states involved, things get complicated,” says Justin Gilmartin, managing director of tax services at the Colony Group in Boston. “If you work in a different state, those wages could be taxable in both your home state and the state where you perform the work. Usually, your home state would give you a credit for any taxes you paid to that other state, but we’ve been seeing states become more and more aggressive.”
A credit may not be offered, and credit amounts that are offered vary by state.
“There are credits so that in theory you’re not paying tax in more than one state, but I do say in theory,” says Donna H. Laubscher, partner at Henry and Horne in Arizona. “For example, if you live in Arizona and receive a 1099 from a company in California, you need to file a California tax return and include that income on an Arizona tax return. So you get a credit for paying tax in California, but because California rates are higher than the Arizona rates, it’s generally not a one-to-one credit.”
Experts say remote workers should ask employers to elect the proper state withholding and take formal steps to establish a bona fide office at your teleworking location to avoid paying additional taxes.
Each state has its own tax code that determines how your remote work will affect your tax liability, so taxpayers should seek to understand the codes for the states in which they live and work and seek professional help when needed.
Tax Deductions for Remote Workers
Though the pandemic’s effect on the popularity of remote work could not have been known, the Tax Cut and Jobs Act of 2017 would go on to hurt the many employees tasked with setting up a home office with very little notice.
This act stripped employees of all miscellaneous itemized deductions, which previously could be used for items like a desk and monitor used for work purposes. Remote contract workers and remote self-employed workers, however, can still take advantage of these deductions for items used solely for business purposes.
“If you are an employee , there is absolutely no benefit,” Laubscher says. “But if you had a variety of income or are self-employed, if that was all income coming from a 1099 and Schedule C, then you can deduct for a home office.”
Remote Workers and Travel
When the pandemic hit, some workers took advantage of the new flexibility by working from family homes or heading out on a road trip, working along the way. But Gilmartin says individuals can face an additional liability even if they only worked from a certain state for a limited time, depending on the state’s laws.
In these cases, the taxpayer becomes a resident of both states and as such, Gilmartin says states are unlikely to offer a credit.
“Many states have a statutory residency, often if you’re in that state for more than half the year. Now all of the sudden all of your income, not just your wages but potentially any portfolio investment income would be fully taxable in both states,” Gilmartin says. “Keep your employer informed if you plan to travel.”
More from U.S. News