If you worked remotely last year, you were part of a vast network of employees who made the move. According to a March 2022 Gallup poll, many people who were able to perform their duties outside the confines of the office made the switch, with 39% working entirely from home base.
If you were among them, get ready for some potential changes to your income taxes. Depending on your situation, you could have a higher or lower obligation than you think, and filing may be a little more complicated than it was in the past.
Here’s what you need to know about the way remote work could affect your 2022 income taxes.
Were You Really a Remote Employee?
As an independent contractor, gig worker or small business owner, you may have worked from home but that doesn’t make you a remote employee. If you were responsible for paying your own IRS, state and local taxes, you were technically self-employed.
Conversely, if your company reported your earnings to the IRS and state and local tax offices and withheld payroll and income taxes, you were an employee — even if you never stepped foot in the company’s building. You could have moved out of state or even left the country to work but you were still a company employee, working remotely.
“Rules are generally based on your activity in each state, but can also trigger taxation based solely on the location of the party paying you,” Jeremy Babener, business and tax expert and founder of Portland, Oregon-based Structured Consulting, says. “States have varying rules, and where those rules vary, there’s opportunity for benefit or harm.
What to Expect if You Worked and Lived in the Same State
As a remote employee, your income taxes will not be affected if you work in the same state as your company is based. So, if you had been working from your company’s headquarters in Boise and then transitioned into your converted garage in another Idaho city, there will be no change to your 2022 income taxes.
Still, many people did take advantage of the work from home option that emerged during the COVID-19 pandemic and moved to seek opportunities. A 2023 U.S. Census Bureau report found that about half the states experienced a population hike during 2021 and 2022, while others experienced a decline.
So, if you left an expensive state to enjoy the lower cost of living in a more affordable one you may have come out ahead, especially if you pulled in the same salary.
[Related:20 Big Companies That Hire Remote Workers]
How Remote Work Can Affect State and Local Income Taxes
The major tax issue you might face concerns moving from one state to another, Mark Friedlich, attorney, certified public accountant and vice president of government affairs at Wolters Kluwer, says.
“In that case you may have an income tax liability in both states,” Friedlich says. “It’s called the convenience of the employer rule, which can result in your income being subject to tax in the state where your employer is located and the state you live in.”
The states that impose this rule are Connecticut, Delaware, Nebraska, New York and Pennsylvania.
Typically, you would receive a tax credit when you file that could effectively eliminate double taxation, Friedlich says, but if you get hit with this rule you would be denied your home state credit.
[Read: 10 Tax Credits You May Qualify for This Year]
For example, if you live in Maine and work remotely for a company in Connecticut, you would be subject to state income tax in Maine and a nonresident income tax in Connecticut because it institutes the convenience rule.
On the bright side, some states don’t impose state income taxes. If you moved to or work in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington or Wyoming — or if your company is located in one of these states — you don’t have to worry about double taxation.
Another consideration: As a remote worker, you may have tax liabilities for city or county taxes both where you live and where your employer is headquartered, and credits do not apply.
Remote Work Doesn’t Usually Affect Federal Income Taxes
Regarding federal income taxes, you won’t see much, if any, differences as a remote employee, Sally Herigstad, tax and personal finance expert and TaxAct blogger from Battleground, Washington, says.
Your employer would withhold taxes from your paychecks just as it did before, no matter where you live and work.
“Self-employed people, independent contractors and freelancers can deduct a variety of home office expenses,” Herigstad says.
“In that case you would have the ability to take business deductions. Not only would that lower your state and federal income taxes, it would reduce your Medicare and Social Security taxes. Most remote workers don’t qualify, though, because they’re employees,” she adds.
[READ: A Guide to Tax Deductions for the Self-Employed]
Where and How You Should File
A common question among remote employees is, “If I work remotely, where do I pay taxes?” The answer depends on residency:
— Stayed in state to work remotely: If you didn’t change states, you will file your return only for the state of your residence.
— Left the state to work remotely: If you left the state and became a permanent remote worker in a different state, you may need to file two returns: a complete residential tax return for your home state and a nonresident tax return for the state that lists your employment income.
Be sure to review the tax laws for your state, city and county of residence — and where your company is located. If you are confused at all, consider getting guidance from a qualified tax advisor.
Tax preparation software, such as TaxAct and Turbotax will usually lead you with the right prompts and questions so you don’t pay more taxes than necessary, but a consultation with a CPA will set your mind at ease.
“If planned well, living and working in a low-tax state can significantly reduce your tax, even if you’re working for clients and employers in high-tax states,” Babener says “The value is there if you take the time and have enough flexibility in how you arrange your work relationships.”
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How Remote Work Could Affect Your 2022 Income Taxes originally appeared on usnews.com
Update 04/07/23: This story was published at an earlier date and has been updated with new information.
