Working From Home? Beware These Tax Issues

If you work from home—or if you're an employer with remote employees—you may face additional bookkeeping and tax-filing requirements if you live in a state different from the one where your business office is physically located or operates. Here are four tax issues to be mindful of.

You'll need to alert your payroll department right away if you move states. That's because workers are required to have taxes withheld in accordance with their home state's tax rules, regardless of where their employer is located. Failure to update your withholding could result in a big tax bill—and even underpayment penalties—come Tax Day.

Be aware, too, that some states also require employers to withhold taxes from nonresident employees' wages. The state of New York, for example, requires employers to withhold state income tax from nonresidents' wages.

When it comes to tax filing time, if you work in two or more states, you may be required to file a tax return for each state. That's because many states require nonresident employees to pay state income taxes if they earned money within that state, regardless of where they live. Some go so far as to require a tax return if you worked in their state in any fashion, including for a business trip.

If you live or work in one of the nine U.S. states that do not charge income tax—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming—you won't be required to report your income to that state.

With the passage of the One Big Beautiful Bill Act, most miscellaneous tax deductions, including unreimbursed business expenses, have been permanently eliminated. (The Tax Cuts and Jobs Act of 2017 temporarily suspended these deductions.) That means any out-of-pocket expenses you incur while working from home that aren't reimbursed by your employer cannot be deducted from your taxes.

If you're self-employed, however, many business expenses can still be deducted on Schedule C of your Form 1040.

If you own a business in one state but have an employee working remotely in another, you may be required to register your business in that employee's home state, as well as pay estimated taxes, file tax returns, and fulfill other reporting obligations to that state. If you find yourself in such a situation, be sure to work through the details with a qualified tax professional who can advise you on the various state and federal tax laws.

Taxes are always complicated, but the shift to working from home makes it all the more important to understand your tax obligations—whether as an employee or an employer. If any of the above scenarios apply to you, be sure to meet with a tax advisor who can help you navigate the intricacies of this complex situation.