The Tax Implications of Remote Work
If 2020 was the year remote work flipped on the turbo, 2023 might feel like the year it finally started applying the brakes. Amazon. JPMorgan Chase. Disney. These are just a few of the many companies that took strides this year to start bringing some of their employees back to the office — some for just a couple days a week, and some for more.
But those companies still have a lot of work to do if their goal is to get everyone back in their cubicles. Consider this: According to a 2023 survey by the Pew Research Center, 35% of workers who can do their jobs remotely are doing so full-time, and another 41% are doing so “most” or “some” of the time. That leaves just 24% of those who aren’t.
Some level of remote work, including plenty of full-time opportunity, is here to stay. And it has various tax implications that workers and businesses alike need to understand. The following are some of the most important ones.
Tax Implications of Remote Work
Home Office Deductions
One of the most popular tax strategies for freelancers and independent contractors is taking the home office deduction. In short, the idea is that if you’re a freelancer or independent contractor, you can actually deduct a percentage of certain home expenses based on your home office space.
But you still have to check off some boxes. For instance, you actually have to have a dedicated work space — anything used for both business and personal purposes doesn’t count. So if you’re working in the kitchen, we’re sorry, but you can’t take a deduction based on the size of your kitchen. (That said, if you exclusively use a part of a room for only office work — say, a portion of a large bedroom where you can put a desk and some equipment — that can be considered an office, and that space can be used as the basis of your deduction.)
It also must be the “principal place of business,” which can be confusing. The principal place of business refers not to the actual work you do, but administrative tasks such as invoicing or paying your workers. So, for instance, if you’re a landscaper who spends most of your time outside, you can still do a home-office deduction.
Lastly, at least until 2025, thanks to the 2017 Tax Cuts and Jobs Act, this break is only for 1099 employees (freelancers and contractors). If you’re a W-2 employee, it doesn’t matter how much you work from home — you can’t take this deduction.
Double Taxation
Normally, you pay taxes in whatever state you live in (unless it’s one of the nine states that don’t have income taxes). However, people who cross a state border for work know that in some instances, they’ll actually have to file and pay taxes to not one state, but two.
Full-time remote workers generally don’t have this issue. For one, they’re typically only required to file in the state they work from, and even in cases where they’d be required to file in both states, the states might have a reciprocal agreement (where certain neighboring states don’t require you to make a separate filing for the state where you travel for work). The D.C. area, for instance, has reciprocal agreements, and many eastern Midwest states have these agreements with one another.
But even if you must file in multiple states, you’re not legally obligated to pay state taxes on the same income twice. Typically, one state will award you a tax credit for taxes paid to a different state. So, for instance, if you’re an Ohio resident and pay $1,000 in taxes to California on money earned in California, Ohio would tax those earnings, too, but it would give you a $1,000 credit to offset the taxes you paid to California.
Also, you need to be aware of state, county and city tax codes, which can often be every bit as complicated as (if not more than) the federal code.
Deducting Business Expenses
Again, this generally doesn’t apply to W-2 employees, but if you’re a contractor, freelancer or self-employed, and you’re a remote worker, you can get a break on numerous expenses.
We provide a robust list of deductible business expenses in this article, which can include everything from the aforementioned home office deduction to business travel and education expenses to salaries and investments.
But you can’t deduct any of this if you don’t keep track of them.
If you plan on deducting anything, keep the receipt, bill, etc. You always want a paper trail, so you have something to show auditors if they come knocking at your door.
This gets a little hazy as it pertains to any deductions that are based on the percentage of time used for work purposes vs. personal purposes. It can time-intensive to keep a detailed record to determine an exact percentage of time — so just provide honest answers that lean toward the conservative.
Employer Taxes
Workers aren’t the only ones who need to be mindful of remote-work tax implications. Employers also have to consider a number of tax consequences as their workforce shifts more (or less) remote.
For instance, payroll tax obligations can change depending on whether an employee is working in the office or remotely from a different state. In some cases, sales tax might differ too — if an employee generates revenues in a different state, the tax obligation might be different.
One area of taxation that you certainly shouldn’t overlook are tax credits and incentives. For instance, some jurisdictions provide tax benefits based on employing some threshold of employees within a certain state, county or city. So even if your headcount doesn’t change, if many employees within a remote-heavy workforce begin moving out of the area or out of state, you might lose the tax benefit or have to renegotiate terms.
Working Remotely or Employing Remote Workers? Talk to Us.
Like just about every other aspect of the tax code, rules relating to remote work are complicated and can vary depending on where you live. That’s why the best advice we can give you is to consult with a professional.
McManamon & Co. provides small and midsize businesses with creative, innovative and proactive tax advice that keeps your company on Uncle Sam’s good side. That includes helping you understand the ins and outs of paying taxes as a remote worker — or as a company with flexible work arrangements.
Reach out and find out what we can do for you and your business! Just call 440.892.8900 or contact us online.
Tags: McManamon & Co., remote work, small business, small business taxes, taxes | Posted in McManamon & Co., taxes