Working from home was already on the rise even before the COVID-19 pandemic. As more and more people transition to remote work, it is crucial to understand the tax implications of this work arrangement. One of the most common questions is where to pay taxes if they work remotely. This question becomes even more complex if someone works across state lines or maintains dual residency. In this article, we will explore the tax implications of working remotely.

Tax Implications of Remote Work

The tax implications of working remotely depend on where the office is located and where the employee is working from now. If employees work remotely in the same city and county, their taxes will likely remain the same. However, the tax situation becomes more complicated if the employee works remotely across a different tax jurisdiction. Each city and state has its own tax rules, and we cannot cover all of them here. Nonetheless, this article will discuss the most common tax implications of working remotely.

1. Income Tax

If you work in the same state as your employer, your income tax situation will unlikely change. However, if you begin working remotely full-time across state borders, you may be required to file and pay taxes in two states.
Most states impose an income tax, but some do not. In addition, employers may be required to pay certain taxes in multiple jurisdictions if employees work remotely in different states. Even having a single employee in a form may trigger the obligation to pay taxes there, known as a “tax nexus.”
Income tax encompasses investment profits, which means that investors who earn a portion of their income outside of work should pay close attention to their tax obligations.

2. Dual Residency

You may face a tax challenge if you divide your time between two or more states. You may be required to pay income tax to two states, resulting in higher tax bills. This is often the case for people who live in areas that straddle state borders, such as New York, Philadelphia, and Kansas City.
In most cases, residency is determined using a standard 183-day rule. If you spend 183 or more days in a state yearly, you may be considered a resident for tax purposes. As a resident, you may be required to pay total income tax on your annual income. Therefore, you should be careful about how much time you spend working remotely in different locations.
If you want to change your state of residency for tax purposes, it may not be automatic. Some states may require evidence of your primary residence, such as your voter registration, vehicle registration, driver’s license, or other documents.
Moving your tax residency to a state with lower taxes or no state income tax could save thousands of dollars each year on taxes. If you have questions about your situation, consider consulting a tax professional for guidance on where to pay taxes.

Work-from-home Deductions

Federal income tax applies to individuals across the U.S. and can be lowered by claiming deductions related to working from home. The home office deduction is an option for full-time workers to claim a portion of their home’s costs as a work-related expense, reducing taxes. However, many people cannot claim this deduction due to strict regulations around its usage. For instance, to qualify for the deduction, the home office must be used exclusively and regularly as the principal place of business. Additionally, individuals working from home should track all work-related expenses their employer will not reimburse. Such costs may be eligible for tax deductions, but specific rules exist on what can and cannot be deducted. It’s advisable to refer to the IRS resources to learn more about these rules. For instance, expenses incurred on office supplies or printing that won’t be reimbursed may qualify for the unreimbursed employee expense deduction.

It’s Okay to Get Help When Your Taxes Get Complicated

Most taxpayers can prepare their tax returns without issue using popular online tax software, which includes various features to maximize deductions and handle complex tax scenarios such as dual residencies and remote work. However, if there is a concern about making errors, consider upgrading to a paid version or hiring an expert. Incurring penalties, back taxes, and audits can be time-consuming and costly. Not all tax software companies provide professional assistance, but some companies, like H&R Block, offer support from live tax professionals. The key is understanding your state’s tax rules and determining whether you need to file in multiple locations. This should encourage everyone to work remotely, as it is becoming an increasingly popular lifestyle and will likely be an integral part of future employment.