The pandemic has changed the way we live, work, and play. One of the most profound changes is that millions of Americans started to work from home instead of going into their office. Some of those folks are now working back in the office while others continue to work from home until the pandemic eases. For others, remote working has been made permanent. Most remote workers are unaware that there can be tax implications for them because of their remote working situation. Here are two main tax issues for remote workers.
Deducting Home Office Expenses
If you are self-employed and working from an office in your home, you can deduct the expenses of the home office as long as they meet the qualifications.
If you are working from home and are an employee, current tax law does not allow you to deduct home office expenses or any other unreimbursed employee expenses. However, your employer can set up an accountable plan that allows them to reimburse you for expenses.
State Income Tax
If you live in a different state than your employer’s location, state taxes can be affected. In most states, employers are required to withhold state income taxes from their employees’ paychecks. When the employee works in one state and lives in another, the employer will withhold taxes for the state where the employee is working.
Let’s look at an example. Joe lives in Iowa and works for a company based in Nebraska. Normally, Joe works at the office in Nebraska. His employer withholds Nebraska taxes from his paycheck. When Joe files his tax return, he claims a deduction on his Iowa return for the taxes he already paid to Nebraska. When the pandemic hit in 2020, Joe’s employer asked all employees to work from home. Now Joe is working in Iowa instead of Nebraska. Joe’s employer had expected the remote working situation to be temporary, so they continued to withhold Nebraska income taxes from Joe’s paycheck. When it became apparent that remote working would continue, Joe’s employer started withholding Iowa income taxes from Joe’s paycheck instead of Nebraska income taxes. If Joe’s employer had not started withholding Iowa income taxes, Joe may owe Iowa income taxes, penalties, and interest and he would need to request a refund from Nebraska.
Employees who are working remotely in a different state than their usual workplace should keep track of the number of days they worked in each state. This information will be helpful as documentation to prove the amount of wages that are subject to tax in each state.
Have more questions about how working from home will affect your taxes this year? At Crystal Financial, we’re always happy to help out! Give us a call or email us today and we’ll answer all your questions.Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.