The COVID-19 pandemic has tested the flexibility of work everywhere. Since the disruption, hybrid and remote work have become the norm, speeding up the trend of these work models.
For many, remote work has many advantages, such as convenience and saving travel time and expenses. On top of these, remote workers can also enjoy various tax advantages. Read on to find out how remote work affects your taxes.
Migrating to Low-Tax States
The general rule is that workers pay income tax to their state of residence. With this, many remote workers save on taxes by relocating to low-tax states.
Due to companies’ work-from-home policy, city dwellers move to suburban or rural areas with low taxes. For instance, remote workers based in Washington, D.C., where the maximum income tax rate is 8.9%, may relocate to Wyoming where there’s no state income tax.
However, as remote work becomes the norm, states are exploring ways to preserve their revenue streams or recoup lost revenue. Some remote workers may even be required to pay taxes in two states, potentially doubling their tax liabilities.
Remote workers employed in companies with a presence in Arkansas, Delaware, Connecticut, New York, Massachusetts, Nebraska, and Pennsylvania will incur a tax liability in the state where the company is located and in their state of residence due to convenience rules.
In these seven states, remote workers will have a tax liability even if they haven’t stepped foot in the state where their company is based. Usually, your state of residence would give you credit for any taxes paid to another state if you work in a different state.
However, some states are becoming more aggressive. Credit amounts vary depending on the state or may not be offered at all.
So if you’re based in Arizona and work for a California-based company, you need to file a tax return in California and include your income on an Arizona tax return. Although you will get a credit for paying tax in California, the tax there is higher than the rates in Arizona. With this, it may not actually be a one-to-one credit.
What employers can do is select the proper state withholding and take the necessary steps to establish a bona fide office at your location, so you won’t have to pay additional taxes.
Remember, each state has its own tax code. So, make the effort to understand the codes for the states you live and work in to know how remote work will affect your tax liability. You may also seek professional help from a CPA to simplify the complexities when multiple states are involved.
Tax Deductions for Remote Workers
Many who set up temporary workspaces in the early months of the pandemic have upgraded to a full-blown home office. Others also set up a home office after leaving their office job and starting their own business or becoming a freelancer.
While some who work from home can enjoy a tax deduction for their home office expenses, many are not eligible. Under the Tax Cuts and Jobs Act, only self-employed individuals or remote contract workers who use their dedicated home office solely for business purposes can take advantage of these deductions.
Some tax-deductible items include furniture and equipment for setting up your office, a dedicated phone line or internet connection, and other business expenses.
However, if you’re an employee, your expenses for your home office are not tax-deductible. This rule applies even if your employer shuts down your office and you’re required to work from home.
If you were temporarily self-employed for just a few months, you might be able to take a partial home office deduction. You must use expenses only for the months you are self-employed to compute your home office expense deduction.
Remote Workers and Traveling
When the COVID-19 pandemic struck, some workers took advantage of the flexibility offered by the new setup by working from their family homes or going on a road trip and working along the way.
However, note that you may incur additional tax liability even if you only worked from a specific state for a limited period. Depending on state laws, you may become a resident of both states, and some states may not offer a tax credit.
Many states have a statutory residency, usually if you have lived in the state for over six months. In this case, all of your income, which includes your wages and portfolio investment income, would be fully taxable in those two states. Remember to inform your employer if you’re planning to travel.
While working remotely offers a lot of benefits, there are also tax implications of remote work that you need to be aware of. The easiest way to understand all these and avoid getting into trouble with the IRS is by consulting with your trusted CPA.
If you’re looking for a reliable tax expert, get in touch with Lear & Pannepacker, LLP today!
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