How Does Working Remotely Affect My Taxes?

Deciding to work from home is about more than wanting to work in your pajamas or eliminating your daily commute. While there are many benefits to working remotely, there are also new responsibilities to consider. As more people become remote workers, freelancers, and self-employed, they face potential tax implications. Learning about their new potential tax liability can help taxpayers prepare to comply with the applicable tax rules.

Remote working existed but wasn’t common until the COVID-19 pandemic. What started as a necessity grew in popularity, and now freelancers, independent contractors, and remote workers are here to stay. More people today find professional freedom by accepting positions that let them work full-time remotely or have a hybrid schedule.

With more people living and working in different places, understanding the potential tax implications of working remotely has become more important. 

How Does Working Remotely Impact My Taxes?

Whether or not working remotely impacts your taxes will depend on several factors. States with income taxes want to ensure those profiting in their state pay the imposed tax. To prevent employers from avoiding the tax, states look to charge non-resident income tax. However, the matter is slightly more complicated. How and when you must pay taxes will depend on where you live, where the company that you are employed with is located, your worker classification, and the income tax laws in both states.

Because the laws can vary significantly from state to state, it is important to educate yourself early. “It’s become a lot more complicated because the geography of locations has expanded,” says Zhanna Ziering, a top-rated tax attorney in New York City for Moore Tax Law Group. “You have to make sure the tax preparer you’re working with understands the interaction of the state laws, and you have to be wary.” Speaking with a tax attorney can help you understand your state income tax obligations. This lets you plan accordingly so you are not surprised when it is time to file your taxes.

1. Potential for Double Taxation

All Americans must file their federal income tax return annually. Depending on the state they live in, they must also file a state income tax. In some states, such as Maryland, they must also pay a county tax. The dilemma with all of these different income tax systems is that it puts some remote workers at risk of being double-taxed for the same income earned. They may have to pay income tax in the state where they live and in a different state where they earned the income.

States have taken steps to address the double taxation issue by offering a credit for those who must file and pay income taxes in two states. The U.S. Supreme Court case, Comptroller of the Treasury of Maryland v. Wynne, also made strides. In that case, Maryland gave a credit for state income taxes but not the county tax. The Supreme Court ruled that not providing a refund for double taxation is unconstitutional. The restrictive and discriminatory tax collection process limited interstate commerce.

2. Reciprocal Tax Agreements

Some states have reciprocal agreements for taxpayers. This enables a taxpayer to qualify for a tax credit in one state and only pay taxes in their state of residence. When states have a reciprocal agreement, your employer won’t need to take a withholding tax.

As the taxpayer, you won’t have to pay the wage income tax in the non-resident state where your employment is. There are reciprocal agreements across 16 states and the District of Columbia. Speaking with a tax attorney can help you understand your tax liability. These reciprocity agreements only apply to wage income and not other income types.

3. Remote Work Tax Deductions

It can be tempting to claim deductions when working remotely. After all, you likely have a home office and the expenses that come with it. However, working remotely is not the same as someone who is a freelancer, self-employed, or independent contractor. Remote employees who receive a W-2 are not eligible to take home office and expense deductions. This is a result of the 2018 IRS tax reform. If a full-time W-2 employee has home office expenses, they should request reimbursement from their employer.

Some states have exceptions to this for their state income tax. Speaking with a tax attorney can help you determine what deductions you qualify for when filing your taxes.

4. Convenience Rule

The convenience of the employer rule applies to remote workers who work in a different state for their own convenience. It is their choice to work remotely, not an employer’s requirement. There is an exception to the convenience rule for remote workers who work in another state because of an employer requirement. Five states have some form of the Convenience Rule:

• Connecticut
• Delaware
• Nebraska
• New York
• Pennsylvania

Arkansas had a version of the Convenience Rule from February 2020 to April 21, 2021, and Massachusetts used a rule in response to the COVID-19 pandemic.

If the Convenience Rule applies and you live in a state with an income tax, you could end up paying double taxes. If you live in a state that does not have an income tax, you would only pay in the state where you worked. Some states, like New York, recognize the unfairness of being taxed twice. They offer a tax credit to offset the state tax paid.

How To Do Taxes When Working Remotely Out of State

The first step in filing your income taxes is to determine your home and work states. States have laws about how long someone must be in the state for it to qualify as a residence or domicile. Generally, the rule is that you must spend more than half the year physically in the state. Your actions, such as where you have a driver’s license, receive mail, or vote, are also considered.

Whether or not you need to file a state income tax return will depend on which state you live and work in. Several states have no state income tax. These states do not require you to file a state tax return.

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Wyoming
• Washington

If the state you are telecommuting with has a reciprocal tax agreement with your home state, then you won’t be required to file taxes in the state where you work. The state where the employee works should not require your company to take a tax withholding. You also won’t be required to file a tax return for the work state.

In situations where there is no reciprocity, non-resident workers need to file an income tax return in both states. Depending on the state, you may be able to get a tax credit from the state where you are working but not living. You would file a resident state income tax form in your home state and a non-resident tax return in the state where you work.

However, there are several potential pitfalls. For example, if the state where you received the credit could have a lower tax rate than your home state, you may still owe residual tax. The credits also don’t apply to county or local taxes. You would need to claim a separate credit for these taxes. For states with a “convenience of the employer rule,” you may be at risk of paying double taxes.

Tips for Managing Remote Work Taxes

The best approach for managing your taxable income as a remote worker is to keep detailed and accurate records. It is important to have records that can validate and verify where you spend your time and where you work. That way, you can prove the amount of time you spend in the state to validate your residence. If you plan to take deductions to lower your taxable income, you also need detailed records of your expenses.

Ziering explains the importance of reading and understanding the law before filing your taxes. “Income is not always reported correctly because you have to really look at the rules of both states and figure out who gets to pick up the income and who gets to claim the credit.”

Find Experienced Legal Help

If you are considering a change in your professional career to work remotely, be self-employed, or become an independent contractor, you need to learn the tax laws. That way, you can make smart career and income choices. You can plan for your tax liability to ensure you don’t get a nasty tax bill. In addition, you will know what records you need to keep so that filing your taxes becomes simpler. Working with a tax attorney can help you stay up to date on the latest tax laws.

Visit the Super Lawyers directory to begin your search for an experienced tax attorney. For more information, read our guide on tax law.