INDIVIDUAL TAX | 10/12/2024
Remote work has become a lasting arrangement for many industries, offering flexibility and benefits for both employers and employees. However, working remotely, especially across state lines, can lead to unexpected tax consequences. Whether you’re an employee or an employer, understanding these implications is essential to avoid surprises and ensure compliance.
Tax Considerations for Remote Employees
Double Taxation Risks
Working remotely in one state while employed by a company in another can create tax complexities:
- Dual Filing Requirements: You may need to file income tax returns in both your home state and the state where your employer is located.
- Domicile vs. Residency:
- Domicile: Your permanent home and primary state for tax purposes, determined by your intent to make it your fixed residence.
- Residency: Based on physical presence in a state, typically exceeding 183 days per year.
- Example: If you maintain a permanent home in one state but spend over 200 days working from a vacation home in another, you could be considered domiciled in the first state and a resident in the second. This situation could result in taxes owed to both states.
Mitigating Double Taxation
Some states offer credits for taxes paid to other states, which can help reduce the impact of double taxation. However, your tax bill could still increase if the tax rates differ significantly between the states.
Challenges for Employers
Employers with remote workers face additional tax obligations:
1 Withholding and Payroll Taxes: Employers may need to withhold and remit income and payroll taxes in multiple states, depending on the employee’s location.
2 Nexus Concerns:
Having remote employees in a state can establish nexus, a connection that subjects the business to that state’s taxes, including income, franchise, gross receipts, or sales and use taxes.
Nexus can increase reporting requirements and overall tax liability for the business.
3 Administrative Costs: Managing tax compliance across multiple states adds complexity and expense for employers.
Business Expense Deductions for Remote Workers
Limited Deductions for Employees
Under current tax law:
1 Employees cannot deduct unreimbursed job-related expenses as miscellaneous itemized deductions through 2025.
2 The home office deduction is generally not available to employees. This deduction is primarily reserved for self-employed individuals.
Reimbursements Through Accountable Plans
Employers can reimburse remote workers for business expenses under an accountable plan, which requires employees to:
- Substantiate expenses.
- Return any excess reimbursement.
Reimbursed amounts are deductible for employers and excluded from employees’ taxable income.
What You Should Do
For Employees
- Understand your state’s tax rules and filing requirements.
- Check if your state or employer’s state offers credits for taxes paid to other states.
- Consider potential tax increases due to differing state rates.
For Employers
- Evaluate payroll tax and withholding obligations for remote employees.
- Assess whether remote employees create nexus in new states.
- Implement accountable plans to manage employee expense reimbursements effectively.
How We Can Help
Whether you’re a remote worker or a business employing remote staff, navigating the tax implications can be complex. Our tax consulting firm provides:
- Guidance on state-specific tax laws and double taxation scenarios.
- Strategies to minimize tax liabilities for employees and employers.
- Assistance with implementing compliant payroll and reimbursement practices.
Contact us today to address your remote work tax concerns and ensure you’re prepared for the evolving tax landscape.