Telecommuting, Taxes and Your Bottom Line
Originally published on December 17, 2020
Updated on August 15th, 2022
Are you telecommuting due to the pandemic? Hoping to deduct some of your new expenses? You may owe more 2020 taxes than you realize. Between changes in how deductions work and multi-state income tax issues, there’s a lot to consider.
Before the pandemic, remote work was considered a perk. But the months spent slaving away at your dining table have revealed some built-in flaws in the setup. Not only are distractions everywhere, you might have new expenses for better equipment—and high-speed internet is an expensive necessity.
If you’re working from home during the coronavirus, you will likely fit into one of two categories. You are a W-2 employee (meaning your employer withholds your taxes and you’re paid through their payroll) or you are self-employed.
If you’re a W-2 employee, you won’t be eligible to claim many telecommuting-related deductions on your tax return. So the cost of computers, printers and other business equipment or supplies is on you unless your employer buys them for you (or reimburses you after purchase).
What about the home office deduction?
The 2018 Tax Cuts and Jobs Act (TCJA) suspended the home office deduction for employees until 2025. Those who can still benefit are the self-employed and gig economy workers who regularly and specifically use part of their home for their business.
However, to claim the home office deduction, you must comply with a specific set of rules. W-2 employees with a day job can claim the home office deduction if they start a side gig at home. The space must be your main place of business and exclusively and regularly used for your side hustle only.
Even without the home office deduction, you might be able to recoup some or all of your telecommuting expenses from your employer. Your employer may have policies in place to compensate you for your home office costs.
If you don’t have a dedicated home office, you may still be out of pocket for things you need to do your job efficiently. The category known as “miscellaneous itemized deductions” was also suspended when the TCJA came into effect. The deductions are subject to the 2% rule, which states, “Most miscellaneous costs are deductible only if the sum exceeds 2% of the taxpayer’s adjusted gross income (AGI).”
In most cases, the added costs a person may have accrued by working from home and miscellaneous deductions that were subject to the 2% rule cannot be deducted.
Remote Work Location and Double Tax
You live in one state but work for an employer located in another state. So to what state do you owe your taxes? This depends on each state’s individual tax laws and nexus policy. In many cases, the other state has the right to tax your salary. In a worst-case scenario, you may find yourself taxed at a higher rate or double-taxed.
You’re safe if your home state has what is called a reciprocity agreement with the other state. This means you’re permitted to pay income tax to the state where you live instead of where you work.
If there isn’t a reciprocity agreement with your home and work states, you might be able to divide your income taxes between the two. This would work by paying taxes to your home state for income earned when you were working from home. You would then owe taxes to your employer’s state for the money you earn while working from the office. (Of course, this only applies when you are splitting workdays between the office and home.)
Arizona and California are two states that have a reciprocity agreement. With other states, telecommuters aren’t so lucky. If your employer is based in Pennsylvania, New York, Delaware, New Jersey or Nebraska (and you don’t live there), you must pay income taxes to your employer’s state unless you can prove that working from home is an absolute necessity and not only convenient. This is called the convenience vs. necessity test.
Then there’s the ultimate income tax danger for telecommuters—being double-taxed by both your home state and your employer’s state. Some states give a credit for taxes due to another jurisdiction, but this isn’t always the case.
Telecommuting from out of state can get tricky with so many variables on who taxes you and when. So it’s essential to keep thorough records of your work and expenses. It’s also a good idea to consult with a tax CPA that understands the various state and federal laws. Where you work, each day is important. With the current economic climate, states need to collect revenue to offset shortages.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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