Over the past few years, it’s become more common for employers to allow their staff members to work remotely on an occasional or even regular basis. And when the COVID-19 pandemic hit, the practice became the norm for many. But while working from home has many benefits (you can’t beat the commute), this setup might impact your tax situation.
If you have been working from home due to COVID-19, it’s likely the IRS will consider you to be temporarily working outside your employer’s office, so you’ll be taxed as you normally would. But whether you only recently started working remotely or you’re an old hand at it, there are certain things to consider about how it could impact your financial situation. Here are five questions to answer before filing your taxes as a remote worker.
WHAT CAN YOU DEDUCT?
Prior to 2018, if a remote worker spent money out-of-pocket for business expenses without being reimbursed, at least a portion of these expenses could be deducted from federal income taxes. However, tax-law changes got rid of those deductions.
The good news is that if you live in a state that collects income taxes and allows for employee business deductions, you may still be able to write off some of these expenses, such as home office supplies and furnishings, work-related tech, a portion of your utilities and cellphone bills, and possibly part of your mortgage or rent payments.
A local tax professional can help you understand which state income tax deductions you are eligible to receive.
ARE YOU BASED IN A DIFFERENT STATE THAN YOUR EMPLOYER?
Working remotely while living in a state that is different from where your employer is located won’t impact your federal income tax situation, but it could have an impact on your state income taxes. The reason? Because your employer might not be withholding state income taxes for you in the state where you live.
If you are a remote worker who lives in the same state as your employer, then you don’t need to worry about this. But if your company is considering making remote work permanent, your status could change, in which case the points below are likely to apply to you as well.
DOES YOUR STATE IMPOSE INCOME TAXES?
As of 2020, nine US states don’t impose income taxes: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. So if both you and your employer are in one of these states, you can cross this one off your list.
However, if you or your employer are based in a state that does impose income tax, then it might get more complicated — you may find income taxes withheld for the wrong state on your paycheck.
The good news is you can only be taxed in a state where you live or perform services. This means that if you do have taxes withheld in a state where you haven’t worked or you don’t live, you will be able to get a refund for that amount. If you did perform work in that state, then while you might owe the income tax, you may be eligible for tax credits from your state of residence. The bad news is that you will likely need to file a tax return for each state and wait for your refund.
DO THE STATES HAVE RECIPROCITY AGREEMENTS WITH EACH OTHER?
Some states, especially those in the Northeast, have entered into reciprocity agreements with one another as a means of insuring that the withholding goes to the correct state for people who live and work in two different states. This is especially common among neighboring states.
If the states do have such an agreement, it should simplify your tax situation somewhat. If the states do not have a reciprocity agreement, you’ll need to file a non-resident return in the state in which your employer is located in addition to the tax return you would file in your state of residence.
DOES YOUR EMPLOYER’S STATE FOLLOW A ‘CONVENIENCE’ RULE?
Some states have a so-called convenience rule, which may put you on the hook for paying income taxes in both states without being eligible for receiving any credit from your state of residence.
Typically, these rules say that if you are working remotely because it is convenient for you — and not because your employer requires it — then you will be subject to paying taxes in your employer’s state as well as in your state of residence.
Not all states follow this rule. Currently, the seven states that have convenience rules are: Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York and Pennsylvania.
Filing taxes as a remote worker can be a complicated process, so it’s a good idea to work with a tax professional who has experience in preparing these types of returns.
This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.