Kapadia LLP CPAs

It’s no secret that remote work has been on the rise, especially since the COVID-19 pandemic. In fact, 35% of workers with jobs that can be done remotely are working from home all of the time, according to a Pew Research Center survey. Chances are, your business may employ remote workers or even hybrid workers. And if that’s the case, it’s important to understand the tax implications of remote work. In this article, we’ll break down tax considerations for both remote workers and employers.

State tax requirements

One of the first things to consider is state tax requirements. Here’s what you need to know:

State income tax for employers:

• Employers must withhold state taxes based on the employee’s work location. This means you may need to register for payroll taxes in multiple states if your employees are spread out.

• If you have employees who work remotely in different states, it may establish a nexus. This can subject your business to various state taxes and filings.

State income tax for employees:

• You generally owe state income tax to the state where you physically work. However, if you work in a state different from your employee’s location, you may need to file a tax return in both states.

• Be aware of the convenience of employer rules. If you live or work in a specific state (i.e., Connecticut, Delaware, Nebraska, New York or Pennsylvania) with this rule in place, it means you’re taxed as if you work in your employer’s state—even if you don’t. You’ll need to file both a resident and a nonresident return, unless you live in a reciprocal state or a state without income tax.

Helpful tip: Check out the Multistate Tax Commission’s website (mtc.gov) for specific state tax rules and agreements.

Home office deductions

If you work from home, you may qualify for certain tax deductions. But it’s important to keep in mind that you’ll need to meet specific criteria.

Eligibility for employees:

• W-2 employees. Due to the 2017 Tax Cuts and Jobs Act, employees who receive a W-2 and work from home can’t deduct work expenses on their federal tax returns to reduce taxable income. However, some states may allow these deductions; check your state for the specifics.

• 1099 employees. If you’re a self-employed individual, independent contractor or a freelancer, you may be able to deduct expenses related to having a home office. But a space must be used exclusively for business purposes to qualify for a deduction.

Calculating the deduction:

• Simplified method. Using the simplified method, you deduct $5 per square foot of your home used for business, up to a maximum of 300 square feet.

• Regular method. If you opt for the regular method, you can calculate actual expenses, including mortgage interest, utilities and insurance, based on the percentage of your home used for business.

Deductible business expenses

Remote work can come with a variety of business expenses that may be deductible.

Internet and phone costs:

• For employees. Employees generally cannot deduct unreimbursed business expenses like internet or phone costs on their federal returns.

• For self-employed individuals. These expenses are deductible if they’re used primarily for business purposes.

Office supplies and equipment:

• For employees. Unless self-employed, employees cannot typically deduct these expenses.

• For employers. Businesses can deduct the cost of providing office supplies and equipment to employees.

Payroll taxes

Managing payroll taxes for remote employees involves understanding the various state and local taxes based on where your employees work, not just where your business is located.

• Withholding taxes. Employers must withhold federal and state income taxes and Social Security and Medicare taxes based on employee work location.

• Unemployment taxes. Employers are also responsible for paying federal and state unemployment taxes, which can vary by state. It’s crucial to stay informed about each state’s requirements.

Employees must inform their employers about any changes in their work location, especially if they move to a different state. Failing to update your withholding could result in unexpected tax bills or even penalties.

Helpful hints for employees: For those who work from various locations throughout the year, you’ll want to track the number of days spent in each location to help determine your tax residency status. And if you end up working internationally, be aware of potential double taxation issues.

Helpful hints for employers: If you employ remote workers, review your policies and procedures around remote work to ensure compliance with tax laws in all relevant jurisdictions. This means keeping payroll systems updated to handle multistate withholding, registering for payroll taxes in states where employees are working, and providing clear guidance to employees about their responsibilities regarding work locations.

Stay informed

Tax laws can be challenging to understand, and they change frequently. Throw remote workers into the mix, and that can add even more complexity to your tax situation. When in doubt, don’t hesitate to consult with a qualified tax professional who can provide personalized advice for your situation.