Working Remotely - Tax Implications You Should Know
Updated: Jun 30, 2022
Due to COVID-19, a large portion of the workforce transitioned to working from home as the pandemic grew. With COVID-19 still gripping our nation, that trend will likely continue. If you are part of the workforce that has transitioned to remote work either temporarily or more permanently, you should pay attention to the following tax consideration when working remotely:
1. The company I work at is a New York City based business, but I have been working remotely at my house in New Jersey. Will it affect my income tax?
The above question is a very common concern for most people who work from home, especially for people who used to work and live in a different state. In general, working and living in a state can result in what we called “tax nexus.” Nexus is basically a connection between the taxing authority and a entity that must collect or pay the tax.
A business that has a physical office/store is one of the key determinants for tax nexus. Having employees located in a state, even if they are working remotely, may result in another tax nexus. Therefore, the employee’s remote home could be treated as an office location, subjecting the employer to tax nexus in that state. Similarly, the employee could be subject to state income tax in the state they are remotely located. However, there are few exceptions for certain types of employees. This was an issue pre-COVID-19, but it will now likely become an even more hotly contested issue among states.
The good news is some states have agreements with each other that nexus will not be asserted if employees are working from home solely due to COVID-19-related closures or social distancing policies. For instance, New Jersey and Pennsylvania have a reciprocal personal income tax agreement, which means Garden State residents working in Pennsylvania won’t face the Keystone State’s income taxes.
It will be a challenge when dealing with multiple states’ tax nexus. If you are planning to work remotely on a long-term basis, you should understand how the tax rate from the state you are working from will affect your income. In addition, if you are working remotely in a different state on a short-term basis or to wait out the pandemic, you should find out how long you can be there before you are subject to tax reporting requirements.
2. Due to the pandemic, I will move back to live with my family in California instead of living in my house in New Jersey. Will it affect my income tax?
One of the factors to calculate your income tax is based on your residency in the state. The common threshold to determine residency is if you spend more than 183 days in the state. In other words, if you have resided in the state for more than 183 days, you may be deemed to be a Statutory Resident.
What if someone lives in another state for over 183 days? Crossing the 183 days threshold could result in the issues of dual residency and potential dual taxation. The extent of taxation depends on the state’s income tax rules. Therefore, plan the number of you days you want to stay in another state before moving out from your “home state”
3. After consideration, I decided to move to California to live and work permanently. I will give up my house in New Jersey. Will it affect my income tax?
Changing the state of residency is common, especially for people to relocate due to COVID-19. It is important that you follow your state’s rules for changing residency. You should update your voter registration, and mailing address. Vehicle registration, or driver’s license to the new state you want to move to. Be sure to keep all documentation for changing your state of residency, as residency audits are on the rise.
Once you moved to a new state, you must inform your HR/employer to change the state of tax withholding in your payroll.
4. My friend is a 1099 contractor, and he can claim home office deduction while he work from home. I am the W2 basis employee. Can I claim home office deduction or any other related tax deduction?
Unfortunately, the answer is No. The Tax Cuts and Jobs Act (TCJA) suspended the home office deduction for W-2 employees for tax years 2018 to 2025. The home office deduction only can apply to self-employed people.
Also, the TCJA eliminated all miscellaneous itemized deductions subject to the 2% of adjusted gross income (AGI) limit, including the deduction for unreimbursed employee expenses. In other words, if you brought a new computer for your home office and you can’t get the reimbursement from your employer, you will not be able to deduct the expense of your new computer in your tax return even though the expense is more than 2% of your AGI.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.