March 3, 2021
Important Tax Considerations for Working from Home
As COVID-19 continues to limit our work environment, many employers are continuing to encourage or require their employees to work from home. There are several tax considerations to be aware of regarding remote work arrangements.
State Tax Obligations for Employers
When an employee works in more than one state, an employer may be obligated to withhold and remit income taxes to each relevant state. In response to COVID-19, states have issued specific guidance on whether remote employees temporarily working in a state due to the impact of COVID-19 creates “nexus,” a tax obligation for an employer who does not operate in that state.
A company’s state withholding responsibilities for remote workers is complicated by the fact that states have different thresholds at which an employer must withhold. For example, certain states have rules based on the number of days that a nonresident employee of that state is working. If the number of days spent in that state exceed the preestablished threshold, income tax withholding obligations will be triggered. Other states incorporate wage-based threshold measures. To layer on top of that, states’ rules and thresholds for nonresidents’ taxation may differ from the withholding rules.
In addition, it is important to understand which state’s unemployment tax will apply. Unemployment tax is paid to only one state, even if the employee works in multiple states. It is possible to continue paying unemployment tax in the employee’s normal work state if telecommuting is temporary, if the employee expects to return soon, and if the employee is still managed by a firm operating in the normal work state. However, if the employee’s services are localized to the telework state for the foreseeable future, unemployment tax may need to be paid to the telework state.
State Tax Obligations for Employees
The employee and employer are required to track any given employee’s working locations to ensure state tax obligation compliance. When taxpayers live in one state but work in another, they may incur tax liabilities in both states. Certain tax credits are available to minimize taxation of the same income in two different states. Some neighboring states have reciprocity agreements that dramatically simplify income tax filing obligations for taxpayers.
The Home Office Deduction
Certain taxpayers, such as independent contractors and self-employed individuals, who use their home for business purposes may be eligible to claim a home office deduction. This deduction is available to both homeowners and renters and allows qualifying taxpayers to deduct certain home expenses on their tax returns (thus reducing the amount of a taxpayer’s taxable income).
Unreimbursed business expenses of an employee, however, including those maintaining a home office, are no longer deductible for federal purposes as miscellaneous itemized deductions for tax years 2018 through 2025 due to the suspension of such deductions by the Tax Cuts and Jobs Act (TCJA). California still allows the home office deduction for employees, as long as the criteria for deduction are met.
Although many individual taxpayers are no longer able to deduct work-related expenses as miscellaneous itemized deductions, some taxpayers may receive tax-free reimbursements of work-related expenses. Qualifying expenses may include business use of cell phones and internet services. If a business has established an accountable plan as detailed in Publication 15, (Circular E), Employer’s Tax Guide, it can claim a deduction for employee reimbursements of legitimate business expenses. These reimbursements are not included in the employee’s taxable income.
Data Security Considerations
Text, instant message, and email are common methods of communications among people in their private lives. However, with teleworking blurring the lines between professional and personal lives, these forms of communication have introduced major privacy and confidentiality concerns for businesses. It is important to have protocols and procedures in place to keep your information safe.
Plan Today for Tomorrow’s Opportunities
Individuals and businesses are encountering an uncertain tax landscape in a world seeing unprecedented numbers of people working from home. If you have questions about how teleworking is impacting you or your business’ tax obligations, please contact your tax team at Realize. We appreciate the opportunity to serve you while navigating these times of great uncertainty.
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Every business, from start-ups to seasoned operations, needs a proactive trusted advisor working for its best interest. Whether your business is technology, venture capital or real estate, Realize can ensure your accounting and tax compliance needs are met. We provide your company with meaningful business advice and make certain you are taking advantage of the tax saving opportunities available to you.