Remote working continues to be rife amid the coronavirus pandemic, which experts say has only served to accelerate the trend of increasing teleworking. Remote working is often attractive to employees looking for more flexibility, but in some cases remote working can also offer tax benefits as well as reduced accommodation and transportation costs.
In April 2020, 69% of U.S. employees were working remotely some or all of the time, and a year later that share was still significant at 51%, according to a Gallup poll. With a large portion of the U.S. workforce still working remotely and a recent increase in offshoring and job changes, tax season 2021 is shaping up to be complicated for many.
For now, many of these remote workers can save on taxes by relocating to low-tax states. But the taxation of remote workers is still a new and developing problem as states become more aggressive in their taxation of non-resident workers based on the location of the employer.
“States are always trying to catch up to preserve their sources of revenue,” said David Danic, director of tax services at Summit CPA Group in Indiana. “Most states are still at a relative impasse based on the pre-pandemic rules, although there were temporary rules that allowed more remote working, and I think states will start trying to collect more income depending on where the employer is located, so they don’t lose all those employees that were previously taxed in that state. ”
Remote work and the convenience rule
Typically, workers pay income tax to their state of residence. This can offer great benefits to 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, DC, where the maximum personal income tax rate is 8.9%, chooses to work remotely from Wyoming, where there is no state income tax, the taxpayer completely avoids income tax.
However, as remote working becomes more popular and taxpayers migrate, states are looking for ways to recoup this lost income – and instead of saving a bundle, some remote workers will end up paying taxes in two states. instead of one, perhaps doubling their tax burden.
Remote workers whose businesses are based in seven states will be subject to tax in their state of residence as well as the state in which their business is located due to the convenience rules. These include Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania.
In these states, the worker never needs to set foot in the state where their company is headquartered to generate this tax liability.
“When you involve multiple states, things get complicated,” says Justin Gilmartin, general manager of tax services for The Colony Group in Boston. “If you work in another state, these wages could be taxable both in your home state and in the state where you perform the work. Usually your home state would give you credit for all the taxes you paid to that other state, but we’ve seen states become more and more aggressive. “
Credit may not be available and the amounts of credit offered vary by state.
“There are credits so in theory you don’t pay tax in more than one state, but I mean 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 business in California, you have to file a California tax return and include that income on an Arizona tax return. So you get a credit to pay taxes. taxes in California, but because California rates are higher than Arizona rates, this is generally not an individual credit. ”
Experts say remote workers should ask employers to elect the appropriate state withholding and take formal steps to establish a bona fide office at your telecommuting location to avoid paying additional taxes.
Each state has its own tax code that determines how your remote working will affect your tax liability, so taxpayers should seek to understand the codes of the states in which they live and work and seek professional help when needed. .
Tax deductions for teleworkers
Although the effect of the pandemic on the popularity of remote working could not be known, the Tax Cuts and Jobs Act of 2017 would hurt the many employees tasked with setting up a home office with very little notice.
This law deprived employees of all miscellaneous itemized deductions, which could previously be used for items such as 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 if you are self-employed, if all of that income came 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 home or going on road trips, working along the way. But Gilmartin says individuals may face additional liability even though they have only worked from a certain state for a limited amount of time, depending on state laws.
In these cases, the taxpayer becomes a resident of both states, and as such, Gilmartin says the states are unlikely to offer credit.
“Many states have legal residency, often if you’re in that state for more than half of the year. Now all of a sudden all of your income, not just your wages, but potentially all investment income. portfolio would be fully taxable in both states, ”says Gilmartin. “Keep your employer informed if you plan to travel.