Workers who use 1099 and Schedule C forms, as well as sole proprietors, can still take advantage of deductions for their home office setups. The answers, unsatisfyingly, depend on a number of factors, including which states and how long you were there, according to tax experts we spoke with. Ahead of tax season, here’s what to look out for when filing your taxes on remote work. Working remotely can be a boon or a bust for your taxes, depending on where you live. Given that remote work taxes can get tricky, there are some common pitfalls you can avoid.

remote work taxes

Where remote work exposes the company to liability, such companies may need to consider creating “blacklist states” — states where employees are prohibited from working remotely. However, all of this is predicated on the idea that the employer can both track the remote work location of all its employees and successfully limit their mobility to certain states. When you’re crystal clear on what you need to pay, you reduce your risk of overpaying or incurring tax penalties.

Tax planning for the TCJA’s sunset

Some states that had pandemic-related moratoriums on tax obligations for remote workers who were traveling state to state, or staying temporarily in certain states, ended those exceptional breaks for 2021. Typically, the rule is that employees pay taxes based on the state where they reside. However, remote work has grown in popularity so much that states are starting to become concerned about the lost revenue that comes with employees leaving high-tax states in favor of low-tax states.

W-2 employees have to pay different taxes than 1099 freelancers or temporary independent contractors; exempt and non-exempt employees have differing tax burdens. However, if the employee resides in a different state than their employer, their hybrid schedule sometimes requires them to pay taxes in the state where they live and work from home and the state to which they commute. There are often mitigating factors in reciprocal agreements that usually exist between the states involved.

International Employment Law Guide

The space must be used exclusively for business purposes, meaning you cannot use the same space for personal activities, such as watching TV or sleeping. However, you may owe taxes in the US if you earn more than $100,000 per year, so you must check your tax responsibilities before you file a tax return to avoid generating tax debt. Offering an employee stipend is one of the easiest ways employers can cover the cost of remote work while remaining compliant with state tax laws. Remote workers who don’t live in the state where they work don’t have to file taxes in both states if they work from home.

“You ultimately sort of end up paying the higher of the two rates, but you don’t pay twice,” Walczak said. There are 30 reciprocal agreements across 16 states and the District of Columbia, according to the Tax Foundation. Had tax burdens at or above the national average, but 14 of them saw a population decrease. Conversely, 24 out of the 32 states with lower taxes than the national average witnessed population growth. According to a report from WalletHub, the top four states with the highest overall tax burden are New York, Hawaii, Maine, and Vermont—all in the double digits.

State Taxes for Remote Work—Who Do I Pay Taxes To, Anyway?

However, they sometimes reduce the tax they pay each state by reciprocal agreements. Reciprocal agreements are tax arrangements where taxpayers often file for exemption of state income tax for one state, avoiding double taxation. Workers typically pay income tax in any state where they reside, but they might also have income tax obligations in the state where their employer’s office is located. In some cases, if a worker is obligated to pay income tax in two states, they will be given a credit by one state for taxes paid in another.

remote work taxes

Klein, who advises several remote retailers, discussed how businesses can navigate these issues. However, Klein stresses that the employee perks of remote working may not always be in workers’ financial interest. “The amount of net worth that has moved out of the big cities has been staggering; COVID-19 has opened people’s eyes,” Klein said. “Even in high-level corporate how are remote jobs taxed professions, lawyers and bankers are now just as effective working remotely as they were in an office. Yet the shift from the office building to the home office carries complicated tax consequences for firms and businesses that have yet to fully adapt to this new model of working. The pandemic tested the flexibility and responsiveness of work and culture everywhere.


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