Before the pandemic, many workers often fantasized about what it would be like to work from their homes. When the pandemic struck, many of them got to find out. Thanks to employers shutting down offices, employees were suddenly working remotely from home. If you are included in this group of workers, you may now be concerned about how this may impact your taxes. Since numerous factors come into play on this matter, you won't be able to decipher the rules and regulations on your own, which is why you will need to rely on the advice of a CPA you know and trust.
Paying Taxes in Multiple Jurisdictions
If you are like many employees who have worked remotely, you may have found yourself working in a different state from that where your office is actually located. If so, you may be wondering if you now owe income tax in multiple jurisdictions, or if you'll be filing income tax returns in more than one state.
Whether you live in a state or just work there, the fact is each state can choose to tax your income. However, factors such as domicile or residency will come into play, so you will need to talk this over in detail with your CPA.
Needless to say, this can get very complicated. For example, in states that feature large metro areas where most workers live in different states, tax credits are usually put in place to ensure workers are not taxed twice. This is done in Washington, D.C., where payroll tax is based on a worker's state of residency.
However, some states including Arkansas, Pennsylvania, New York, and several others tax workers based on job location, meaning they are expected to pay taxes even if they live and pay taxes in another state.
Working Remotely in Multiple Locations
In some situations, workers like you may find themselves working remotely in multiple locations, which can create even more confusion when it comes to paying taxes.
As an example, you may live in Florida as your primary residence. However, due to a mandatory office closure by your employer, you find you are able to work from a vacation home in North Carolina. In this situation, when it's time to file your taxes, you would need to file a nonresident income tax return on whatever you earned while working in North Carolina, which would be filed with your usual tax returns.
As to why you would do this, it comes down to the tax rate in your remote location. If the tax rate in the remote location is higher than in your home state, or there is no income tax imposed by your home state, the tax credit in your home state will likely not be enough to offset any taxes you may owe. To keep employees from having to pay additional taxes, some employers choose to establish a teleworking office in the location of their remote employees.
Working Remotely: Necessity or Convenience?
When questions arise about employees paying taxes while working remotely, one of the deciding factors states take into consideration is whether the employee was working remotely out of necessity, or did they instead do so because it was simply a more convenient option. If working remotely was a necessity, it becomes easier to win your argument and thus pay fewer or no taxes in the state where you worked remotely. However, if the state determines you worked remotely just out of convenience, expect to be paying more in taxes.
Remote Workers and Tax Deductions
As a remote worker, you may have assumed this will entitle you to a number of tax deductions. However, you may be less than pleased with how the IRS has approached this matter. Before the Tax Cuts and Jobs Act was passed in 2018, taxpayers who were employees could deduct job-related expenses, such as the desk and computer they used while working remotely. In addition, other miscellaneous itemized deductions could be taken, but only if they exceeded two percent of the employee's adjusted gross income. But as tax reform came along, the bad news for you as a taxpayer is that these deductions have been suspended from 2018-2025.
Always Keep Good Records
When it comes to your taxes, you no doubt realize by now that keeping good records is essential to helping you avoid problems big or small. By having excellent records, it becomes that much easier for your CPA to help you navigate the complexities involved with paying taxes while working remotely. Therefore, if you have worked remotely like so many other employees, it is vital you carefully track exactly how many days you worked in various states, how much money you earned doing so, and anything else you deem to be important.
How to Lower Your Tax Bill
If you think you are stuck with having a large tax bill due to working remotely, the good news is that by working with your CPA, you may be able to substantially lower your final tax bill. For example, your CPA may recommend you change your withholding status, which could be a big plus in your favor. In addition, you could also work with your CPA to find other ways to lower your overall tax liability, so keep an open mind and trust the advice you get from your CPA.
Employer Mistakes
Since the pandemic brought about much confusion in the workplace, many employees have dealt with mistakes made by employers that resulted in their tax situations getting muddled. In many situations, employers may not have realized an employee was working in a different location, such as a vacation home. When this occurs, taxes are not properly withheld from income, resulting in a surprise come tax time.
If you want to avoid unexpected surprises come tax time, do all you can to keep accurate records and communicate with your employer. By doing this and consulting regularly with your CPA when you have questions, working remotely will be a bit easier.