Tax Implications of Remote Work

Whether due to the coronavirus pandemic or simply to become more productive, many professionals have chosen to work from home. While working remotely has a lot of benefits, it also has its share of tax issues.

If a person performs services in a state other than their place of residence, they could be subject to double taxation. However, some states have a convenience rule that prevents this from happening as long as the worker is performing services for their employer.

State Income Taxes

The flexibility of remote work offers a myriad of benefits to employees, from avoiding frustrating commutes to spending time with family. However, this arrangement can have tax consequences that both employers and employees should be aware of.

Depending on the state, employees may have to pay both income taxes and business expenses for work performed outside their home states. There are a few rules that can help avoid this double taxation, such as the convenience rule and reciprocity agreements between states.

The rules surrounding this issue can be complex, and it is important for both employers and employees to understand what they are responsible for. Additionally, both parties should consult with an accountant to ensure that they are not unnecessarily paying tax. Nexus created by remote workers can trigger additional taxes for state income, gross receipts, and sales taxes, so this is a vital area to focus on.

State Sales Taxes

When it comes to state sales taxes, the situation can get complicated for remote workers. Unless a company’s policies indicate otherwise, employees are generally taxed by the state in which they live and work. For example, if an employee in Utah works remotely from their home in Oregon for a company located in the same state, the employer must withhold all applicable Oregon income and unemployment taxes from the worker’s pay.

However, the situation can become complicated if an employee chooses to work from outside of their own state for a particular reason (such as to avoid a COVID-19-related commute or to visit family during the pandemic). In these situations, the worker might be considered a resident of the state where they are working, and may therefore be liable to pay income tax in that state. This creates a problem for employers that are based in one state but employ remote workers in other states because it can trigger nexus issues.

Local Business Taxes

Over the COVID-19 pandemic, many workers sought out remote work options to escape crowded cities, save on commutes or even take a “workcation” for some fun in the sun. While the convenience and flexibility that comes with working from home can be a great benefit for both employees and employers, it presents some unique tax considerations.

If a worker is a full-time remote employee, income taxes are typically based on the state of residence, but this may change if the employer has an office in a different state than where the worker lives or works. If this is the case, withholding taxes must be adjusted accordingly to ensure that employees are receiving the correct amount of federal and state income taxes.

Hybrid remote workers also face special considerations, as they may qualify for some states’ sales tax laws if their employer maintains offices in those areas. Whether as a W-2 employee or 1099-NEC independent contractor, determining which sales tax laws apply can be complicated and requires careful analysis.

Federal Taxes

As COVID-19 continues to subside and return-to-office plans get pushed back, remote work will remain common. While the flexibility that comes with telework offers great advantages for workers, it also brings added complexities when it comes to tax liability.

Typically, workers pay income taxes in the state where they live. However, if a worker takes advantage of their company’s remote work policy to relocate from a high-tax to a low-tax state like Wyoming, they may find themselves in trouble come tax time. They will need to file a return in both states unless the company elects to use a reciprocal agreement with the state of Wyoming or the employee meets the state’s convenience test.

Similarly, if an employer has headquarters in one state, the employee lives in another, and works from a third state for a few months during a family vacation, the company can create nexus for sales taxes and income taxes in that third state without the necessary waiver. Understanding these complicated state and local rules can help employees avoid unnecessary surprises.