Remote Worker Taxation Considerations: What Employers and Employees Should Understand
By: Christopher L. Nuss & Maggie Simonson Schild
Since the beginning of the COVID-19 pandemic, remote work has become common in a variety of workplaces and fields. Working from home has become a necessity in some cases, with more and more employees switching to permanent or regular work-from-home arrangements. This unprecedented shift towards remote work has certainly created conveniences for many, but it is important that both employers and employees are aware of various tax implications remote work can create.
Permanent vs. Temporary Remote Work
The first and foremost consideration for both employers and employees is the status of the remote work arrangement. The employer should establish whether the employee is a permanent remote worker, one whose worksite is outside the geographic location of the business, or if they are a temporary remote worker who has retained their worksite at their employer’s geographic location, even if they have been working from home due to the pandemic. The status of the remote work arrangement impacts other considerations, especially when it comes to establishing residency for tax purposes and determining state withholding obligations.
State Income Taxes
Remote work appeals to many workers due to the possibility it presents to work from anywhere, not just from “home.” However, the location you work at matters when it comes to taxes and can have different implications depending on the state in which the work is being performed. If an individual is working in the same state in which they live and pay taxes, it is unlikely to result in any complex tax situation. The tax situation becomes more complex when state lines are crossed, and an individual is working in a different state than in which he or she reside and pay taxes. In these situations, it is possible that the employee is creating “nexus” or a connection for the employer to a different state, meaning the employer could now have a tax presence and resulting exposure in that particular state. This physical location could cause tax implications for the employer, such as nexus issues and additional withholding requirements, as well as potential state income tax implications for the employee.
Other Residency Considerations
Determining residency is one of the most important considerations. Some states have what is known as a “183-day residency rule” in which an individual will be considered a full-year resident for tax purposes if they spent more than half the year there. This has the potential to result in dual residency and dual taxation if a state believes an individual to be a resident of both states. This could result in multiple states attempting to tax the employee. However, some states have adopted what is known as “reciprocity agreements,” that allow for an individual who is a resident of one state to work in a nearby state without facing these potentially complex consequences. This could mean being given a state tax credit or arranging which of the two states will collect state income tax from the individual.
Possible tax consequences as a result of residency considerations depend greatly on the applicable states involved. While some states have implemented various measures to assist with the shift towards remote work and how this impacts taxes, other states have issued only temporary policies, and some have not provided any guidance. To say the least, this is a fluid situation for many states, and rules are adjusting by the day across the United States.
Home Office Tax Deduction
Home office deductions have become a confusing area of taxation for many as the popularity of remote work has grown. Certain types of workers have qualified for home office deductions since long before the pandemic, including freelancers and small business owners who work from home. However, working from home does not automatically qualify a taxpayer for a home office deduction. In fact, this deduction is only available to self-employed people who use their home regularly and exclusively for business during the tax year. Workers who are employees of a company would not qualify for a home office deduction. This means that, unless an employer has a reimbursement policy indicating otherwise, remote workers are not compensated (whether through a deduction or reimbursement) for expenses related to an employee’s home office, such as potential repairs or utilities.
There are a variety of tax implications affecting both employers and employees that should be considered regarding remote work. It is important to analyze them carefully for each state involved with an appropriate tax professional to minimize unintended tax consequences and maximize understanding of this quickly and continuously evolving area of tax. If you have questions surrounding any tax related matters, please reach out to Christopher, Maggie, or one of our other Taxation Attorneys.
Special thanks to summer associate Emily Mertz-O'Brien for her significant contribution in writing this article and researching many of the underlying taxation issues.
This article was written for general informational purposes and summarizes tax laws. As such, it should not be relied upon for compliance with the Internal Revenue Code or state tax laws.