This article will discuss how working from home may affect your taxes. We will cover the following topics:
- How working from home affects income taxes
- Including work-from-home deductions
- Dual residency and remote work
- Should you change your state of residency?
Like many other aspects of our lives, Covid-19 and the resultant shift to working from home will wreak havoc on our 2020 taxes. A growing number of companies have announced that they will allow employees to continue to work from home after the pandemic has subsided. Freedom to work remotely means an employee may not work in the state that the company operates. For some, the impact on their taxes will be minimal; for others, they may be profound.
How Working From Home Affects Income Taxes
If you haven’t relocated and your company operates out of the state you live in, your taxes probably won’t change much. But if you now work from home in a different state than the one you were traveling to for work, or you relocated to a new state, then you should educate yourself on the tax consequences.
While your federal income taxes don’t change based on the state you live in, your income tax depends on the location of your remote office—probably your house—and where your company is based. If the two sites are in different states, you may face additional tax burdens.
The relationship that determines how an employee and employer’s taxes are affected in a particular state is called the “tax nexus.” The tax nexus describes the degree of connection between a taxing entity, such as a state, and an operating entity, such as the company you work for or own. The tax nexus defines how the company should pay or collect taxes.
A “tax nexus” usually requires that the company have a physical presence in the state; however, that presence doesn’t have to be an office location. A tax nexus usually isn’t triggered by traveling sales employees. But many states have guidelines indicating the presence of a telecommuting or remote employee that is not involved in sales, has no contact with customers, and whose home is not a place of business for the employer will trigger the out-of-state income tax nexus. A remote employee may subject their employer to that state’s tax nexus, and the employee will likely have to follow their residency’s state income tax.
Including Work-From-Home Deductions
The majority of W-2 employees won’t have much to add in work-from-home expenses. The Tax Cuts and Jobs Act (TCJA) prohibits home office deduction for W-2 employees through 2025. However, employees should be proactive in determining what work-related items and expenses are eligible for reimbursement. In most cases, if the company deems the item necessary, they will reimburse the employee.
Home office deductions are available for self-employed individuals, but they must use their home “regularly and exclusively” for work. A typical example of regular home use includes having a room in your home that is solely used for business purposes. Deductions also extend to items, equipment, and other things considered necessary for work. If you are self-employed and your workspace has shifted to your home due to the pandemic, we highly encourage working with a tax attorney and an accountant to maximize your deductions.
Dual Residency and Remote Work
Dual taxation due to dual residency can be a complete surprise to those not familiar with the rule. Most states determine an individual’s residence based on the number of days spent in that state. Dual residency usually doesn’t apply to those who regularly travel to another state for work; there most a “domicile” to which the person intends to return. Relocating to another state, having multiple homes in different states, and having consistent business activities and interests in another state are the most common reasons for triggering dual residency. The threshold for most states is 183 days. If you relocated because your company switched to remote work due to the pandemic, you might be subject to dual residency—especially if you haven’t sold your previous home.
Should You Change Your State of Residency?
Generally, if you relocate to another state for any reason and have no intention of moving back to your previous state in the near future, you should change your state of residency. Changing your state of residency involves updating your driver’s license, voter registration, and vehicle registration. Keep all documentation of your residency change in case you’re audited. Changing your state of residency sooner than later can help you avoid tax complications and dual residency. You should also check with your employer on any withholding issues. If you have questions about employee or employer taxes associated with remote work, give us a call at (630) 324-6666 or contact us online to learn more.
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