How
REMOTE
Could Affect Your
2021 Income Tax
WORk
Remote work continues to be commonplace amid the coronavirus pandemic, which experts say has only served to
speed up the trend of increased teleworking.
Remote work is often appealing to employees seeking more flexibility, but in some cases remote work can also offer tax advantages alongside reduced
housing and
transportation
costs.
TAXES
In April 2020...
69%
of U.S. employees worked remotely some or all of the time.
And one year later, according to a Gallup poll, that portion was still sizable at...
51%
With a large portion of the U.S. workforce still working remotely and a recent uptick in relocation and job hopping, the 2021 tax season is shaping up to be complicated for many.
For now, many of those remote workers can save on taxes by relocating to low-tax states.
But the taxation of remote workers is still a new and developing issue as states become more aggressive in their taxation of nonresident workers based on employer location.
"States are still playing catch-up to preserve their revenue streams."
— David Danic, director of tax services at Summit CPA Group in Indiana.
"Most states are still in a relative standstill based on pre-pandemic rules, though there were some temporary rules that allowed more remote work, and I believe states are going to start trying to pick up more revenue based on where the employer is located so they're not losing all of those employees that used to be taxed in that state."
Remote Work and the Convenience Rule
As a general rule of thumb, workers pay income tax to their state of residence. This can offer great advantages to the city dwellers migrating to suburban or rural areas who can take advantage of their company's work-from-home policy and relocate to a low tax state.
For example, if a taxpayer who lives and works in Washington, D.C., where the maximum individual income tax rate is 8.9%, opts to work remotely from Wyoming, where there is no state income tax,
maximum individual income tax rate is 8.9%
opts to work remotely from Wyoming, where there is no state income tax,
the taxpayer avoids the income tax altogether.
and instead of saving a bundle, some remote workers will end up paying taxes in two states instead of one, possibly doubling their tax burden.
states are seeking ways to recoup that lost revenue —
However, as remote work becomes more popular and taxpayers migrate,
TAX
Remote workers whose companies are based in seven states will incur a tax liability in their state of residence as well as in the state in which their company is located due to convenience rules. These include:
These include Arkansas, Connecticut, Delaware, Massachusetts, Nebraska,
New York, and Pennsylvania.
— Justin Gilmartin, managing director of tax services at the Colony Group in Boston.
"When you get multiple states involved, things get complicated."
"If you work in a different state, those wages could be taxable in both your home state and the state where you perform the work. Usually, your home state would give you a credit for any taxes you paid to that other state, but we've been seeing states become more and more aggressive."
A credit may not be offered, and credit amounts that are offered vary by state.
— Donna H. Laubscher, partner at Henry and Horne in Arizona.
"There are credits so that in theory you're not paying tax in more than one state, but I do say in theory."
For example, if you live in Arizona and receive a 1099 from a company in California, you need to
file a California tax return and include that income on an Arizona tax return. So you get a credit for paying tax in California, but because California rates are higher than the Arizona rates, it's generally not a one-to-one credit."
Experts say remote workers should ask employers to elect the proper state withholding and take formal steps to establish a bona fide office at your teleworking location to avoid paying additional taxes.
Each state has its
own tax code that determines how
your remote work
will affect your tax
liability, so taxpayers
should seek to understand the codes for the states in which they live and work and seek professional help when needed.
Tax Deductions for Remote Workers
Though the pandemic's
effect on the popularity
of remote work could
not have been known,
the Tax Cut and Jobs
Act of 2017 would go on
to hurt the many employees tasked with setting up a home office with very little notice.
Though the pandemic's
effect on the popularity
of remote work could
not have been known,
the Tax Cut and Jobs
Act of 2017 would go on to hurt the many employees tasked with setting up a home office with very little notice.
This act stripped employees of all miscellaneous itemized deductions, which previously could be used for items like a desk and monitor used for work purposes. Remote contract workers and remote self-employed
workers, however, can
still take advantage
of these deductions
for items used solely
for business purposes.
— Donna H. Laubscher, partner at Henry and Horne in Arizona.
"If you are an employee, there is absolutely no benefit."
"But if you had a variety of income or are self-employed, if that was all income coming from a 1099 and Schedule C, then you can deduct for a home office."
Remote Workers and Travel
When the pandemic hit, some workers took advantage of the new flexibility by working from family homes
or heading out
on a road trip,
working along
the way.
But Gilmartin says individuals can face an additional liability even if they only worked from a certain state for a limited time, depending on the state's laws.
In these cases, the taxpayer becomes a resident of both states and as such, Gilmartin says states are unlikely to offer a credit.
— Justin Gilmartin, managing director of tax services at the Colony Group in Boston
Many states have a statutory
residency, often if you're in that state for more than half the year. Now all of a sudden all of your income, not just your wages but potentially any portfolio investment income would be fully taxable in both states. Keep your employer informed if you plan to travel."
This infographic was designed by Avalaunch Media
Arkansas
CONNECTICUT
DELAWARE
Massachusetts
NEW YORK
Pennsylvania
Nebraska
In these states, the worker need
not ever step foot in the state where their company office is located to generate this tax liability.