Tax Consequences of Remote Working
Millions of Americans suddenly found themselves working from home this past spring - just one of the many significant effects brought on by the COVID-19 pandemic. By now, the majority of workers have grown accustomed to working in their home office and balancing their daily responsibilities. Working from home is one of the best ways for businesses to keep their employees safe without experiencing a major drop in profits - with the right combination of cloud solutions and positive habits, remote employees can be just as productive, if not more, than their office working counterparts.
While some have now returned to work, it’s expected that many workers will have to continue working from home for the foreseeable future. Since these arrangements are here to stay (at least until a vaccine can be developed and distributed around the country), employees and employers alike will now be forced to deal with the surprisingly complicated tax consequences of remote working. Unfortunately, it isn’t as simple as taking a tax deduction for working from home or writing off your home office - there are a number of important things to take into account before next year’s tax season rolls around.
Remote working tax consequences for employees
If you’ve been working from home in an effort to reduce the spread of COVID-19 since the beginning of the pandemic, it’s very likely that you’ve already considered the potential tax consequences of your new work environment. While the arrangement may be temporary for many workers, it’s thought that some companies will make the move to permanently hosting at least some remote workers. Whether you’re in this for the long-term or looking forward to moving back into the office, it’s important that you understand what working from home means for you during tax season.
Those working from home full-time won’t be able to take advantage of the unreimbursed employee expenses deduction, the tax benefit many were hoping to receive, but which, as of tax year 2018, is no longer an allowable deduction for employees. Instead, the implications will depend on where you’re working from and what your employment status is. Unless you’re an entrepreneur or independent contractor, there’s sadly little that you’ll be able to write off in terms of work-related expenses.
You’ll also have to take into account the many different income tax arrangements of different states - if you’ve uprooted or are staying with family or friends during the pandemic, the income you generate may be subject to the income tax regulations of the state you’re currently working in. It’s important to do your research to determine how long you can work from a particular state before you’re subject to their income tax reporting requirements. You may qualify for an income tax credit depending on agreements between states, or you could find yourself having to pay higher taxes than usual. Do your research and let this inform your remote working decisions - in some cases it may be wise to return to your home state.
Tax consequences for businesses with remote workers
The tax consequences get even more complicated for employers hosting a remote workforce who are subject to tax nexus standards, the presence of your business in a state with regards to taxes, and apportionment, the division of income which a given state can tax. Since your employees are now working remotely, there’s a good chance that they’ve taken advantage of the arrangement and are now working from out of your home state. Whether they’ve moved outright or are working from a family member’s home, your business may now have to deal with various state payroll tax standards.
It’s not as simple as withholding taxes in states where your employees are now working from, as many states have reciprocal agreements that can complicate these arrangements. Other states have specific requirements for withholding taxes depending on the details of remote working arrangements - specifically if employees are working from home for their own convenience, or the convenience of the employer. Each arrangement will carry with it different consequences depending on the state they’re working from, and how that state views remote working arrangements.
Good news for self-employed remote workers
Unlike remote employees, self-employed remote workers can take advantage of tax breaks related to home offices. Regular remote employees won’t be able to use these deductions until at least 2025, as it was previously suspended by the Tax Cuts and Jobs Act (TCJA). Those who are self-employed and using a home office to conduct business, however, are allowed to use the home office deduction, as long as you can prove that your office is being used exclusively for business rather than a mix of personal and businesses uses.
This means that you may be able to deduct part of the costs associated with your home office, including utilities, repairs, mortgage interest, property tax, and insurance. This deduction is limited to what your business’s annual profit is, so if you’re currently operating at a loss, you won’t have the ability to carry forward expenses for future deductions.
The best thing to do, considering that tax laws and benefits differ from state to state, is to hire an accountant to help you determine what the benefits are in your particular situation. If your company has announced that you will be remote working into 2021, you won’t be the first to consider moving to a less expensive area with more tax benefits - just consult with your management first to ensure that such a move is approved. Some companies may have contingency plans in place that call for a return to the office if COVID-19 numbers hit a certain mark, or they may want you to be within commuting distance in the event of an emergency.
By familiarizing yourself with the tax consequences of remote working, employees, employers, and entrepreneurs will be much better prepared for tax season, and can make informed decisions about where they work, whether a return to the office would be a better alternative, or if remote working will be the norm going forward.