The coronavirus pandemic has initiated a new way of life for people all over the globe. One of the changes millions of Americans have adapted to is remote work. According to a report from the Federal Reserve Bank of Dallas, employees working from home increased from 8.2% in February to 35.2% in May.

While, for many, working from home may be a welcome reprieve from long commutes and uncomfortable office attire, others are struggling with juggling home responsibilities with work responsibilities. The tax implications of remote work may not come to your mind as a priority with all the other stressors in the world right now, but the implications are important to understand so you don’t have any big surprises at tax time.

For many people, remote work means working from a home office that is based in a different state than where they commuted to. This may be because they’re in an area where cross-border commuting is common, but some people have also relocated to help care for family members or to take advantage of areas with a lower cost of living.

If your remote work location is different from the state you commuted to, you may unexpectedly encounter a confusing situation when it comes to filing your 2020 state tax returns and may face unexpected income tax liabilities.

Tax Impacts on Remote Workers

In most cases, state taxes are paid based on the state in which the work is performed rather than the employer’s location. So, if you’ve had income earned in multiple states throughout the year, you will likely need to file a return for them all.

Each state has its own requirement for the length of work that applies—some require a tax return to be filed for just one day of work—so it is important to read up on your state rules and keep records of how many days you worked at each location.

Many states provide credits to offset taxes paid to other states in order to avoid double taxation, but other states will double-tax workers. Thanks to recommendations from the American Institute of Certified Public Accountants (AICPA), some states are alllowing wages to be taxed based on the employer’s location rather than the home office location. Both the states for your employer’s site and your home office’s base must have signed on to this agreement for it to apply to your situation.

Localities such as Maryland, Virginia, and Washington DC have reciprocity agreements due to frequent cross-border work travel. In this case, you will pay income taxes based on the area in which you live rather than where your work is performed.

In contrast, New York, Connecticut, and New Jersey have many cross-border commuters but do not have reciprocity agreements in place. New York, in particular, is known for its strict state tax rules, such as taxing remote workers whose job could have been performed in New York even if it was completed in another state. In such situations, New York considers the remote work to be performed for “convenience” rather than necessity. Local taxes add another layer of complication to the working-from-home scenario.

While it is important to educate yourself, seeking help from a tax professional is a great way to keep on top of the complications this year.

Under old tax laws, employees could deduct home office expenses as an itemized deduction. Unfortunately for many, current law disallows such a deduction for employees, though it is still allowed for those who are self-employed. Making the change from office work to remote work should not have any impact on your employee vs. self-employed status, so you may find yourself stuck with extra expenses you weren’t prepared for.

Asking employers for reimbursements for items such as office chairs or printing supplies may help lessen this unexpected burden. After all, they’d typically provide these for you in-office, so why not in your new workspace?

Tax Impacts on Businesses

While there are certainly complications at the personal level when it comes to employees working remotely, there are impacts on business taxation as well. Remote workers can create physical nexus for a state, subjecting the employer to that state’s tax, labor, and employment laws.

Allowing employees to work remotely from a different state can create income, gross receipts, and sales and use taxes that the business might not have otherwise had to pay. The company may also have to acquire workers’ compensation and unemployment insurance in the state where the employee is working. Some locales, such as DC, have offered businesses relief during pandemic times.

If remote workers don’t establish nexus for a business, the company may still see a change in tax liability due to an impact on its apportionment formula.

Before You Move, Talk to Your Employer

Certainly, a lot of people have considered moving to areas with a lower cost of living because of the remote-work shift. This is especially true for employees of companies that plan to institute permanent work-from-home policies moving forward.

But it is essential that you check with your employer before making a move to ensure they are OK with your decision since relocation can cause tax obligations they might not be willing to pay. Some employers are reducing compensation to match the cost of living in locations employees are moving to, so making a permanent change may no longer be as appealing unless you just really don’t enjoy the city lifestyle.

Clearly, while remote work has been a nice lifestyle change for some, it potentially brings along some complicated tax implications that you might not have thought about.

Working with a tax professional can help you navigate these confusing times and help you make smart decisions regarding the tax issues that come with this new change of life. We all have enough things to worry about right now, so seeking outside help can take some of that stress off of your plate.

Discuss your situation with a fee-only financial advisor.

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