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Working from Home from Now On? Here's What You Need to Know

by
Spencer Wilson
on
6/15/2020
Working from Home from Now On? Here's What You Need to Know

The recent COVID-19 pandemic resulted in millions of employees being required to work from home when their companies were advised to close their doors, allowing them to protect their employees through social distancing. For some employees, working from home may have been a regular part of their work schedule, while others may have been experiencing it for the first time during the pandemic.

In recent weeks, as companies continue to reopen their doors, some businesses are moving to have their employees work remotely on a permanent basis.  This could be due to a change in office policy as a result of social distancing recommendations or a completely new way of business operations. If you are one of those employees who will continue to work from home, here’s what you need to know to be prepared for the tax implications.

Potential Tax Liability in Multiple Jurisdictions

If you live and work in the same city or state, there is a good chance your potential tax obligation will remain unchanged.

However, if the office where you typically work is in a different state than your home or other location as a remote worker, you may be subject to additional tax obligations.

Depending on the state, you may now need to file non-resident tax returns to pay taxes on the income for the time you worked in that state.

Additional Payroll Tax Withholding

In addition to increased state tax filing requirements, you may now be subject to payroll tax withholding for the additional state and local jurisdictions where you are working. It is important that you follow up with your employer to determine whether these withholding requirements might apply to your circumstances.

Reciprocal State Agreements

If you are working in a state separate from where your company is located, your additional tax obligations may be mitigated if the state where your company is located has reciprocity with the state where you work remotely.

Reciprocity for state tax purposes means that residents of one state can be exempted from being required to having taxes withheld in another state. This results in a reduction in the amount of tax filings needed to be completed.

For example, a taxpayer living in state A and working in state B, can request an exemption of withholding in state B, if the two states have a reciprocity agreement. This results in the taxpayer only needing to file a tax return in state A rather than both states A and B.

The following states have a reciprocity agreement with at least one other jurisdiction. Please work with your employer to determine whether these rules apply to you. Please note this list references the taxpayer’s state of employment rather than your resident state.

  • Arizona
  • District of Columbia
  • Illinois
  • Indiana
  • Iowa
  • Kentucky
  • Maryland
  • Michigan
  • Minnesota
  • Montana
  • New Jersey
  • North Dakota
  • Ohio
  • Pennsylvania
  • Virginia
  • West Virginia
  • Wisconsin

Returning to the Office

If your employer is now re-opening their offices, it is important to determine whether you will continue to work from home for your convenience or at the requirement of your employer.

If your employer is located in a state such as Delaware, Nebraska, New Jersey, New York, or Pennsylvania, you could be subject to double taxation for the days you worked in your home state, if you are determined to be working from home for your convenience. The days you worked from home would be subject to taxation in both jurisdictions.

Limitation of Tax Credits

Most states allow taxpayers to take a credit for the amount of taxes paid to another jurisdiction outside of the resident state.  This tax credit, however, is typically limited to the tax rate of your resident state.

This means that if the tax rate in the state where you work is higher than the state where you live, your tax burden as a consequence, may be higher.

Other Tax Issues

While the home office deduction was available to employees, beginning with tax years 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) has eliminated this provision. The home office deduction is still allowable for self-employed workers and independent contractors.

Now that you are working from home, your employer may be providing you with the supplies necessary to get the job done right.  If your employer provides you with these necessary expenses or reimburses you for your purchase, this will generally not be considered to be included in income.

Working from home can be a dream come true for many people. No longer having a commute and sitting in traffic can make almost anyone jump for joy.

It is, however, important to understand the potential tax impact before setting up that brand-new office chair.

If you have any questions regarding the tax implications of working from home permanently, please contact your tax professional.

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Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

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