Working From Home? Beware These Tax Issues

Even before COVID-19 forced businesses to transition to a remote-work environment, the share of America's labor force working from home was on the rise. For example, between 2005 and 2019 the number of people who regularly worked remotely increased 216%.¹ The pandemic only accelerated these changes. Even as millions of Americans have begun to return to the office, it's become the norm to offer office workers the option to continue telecommuting either part- or full-time.²

Those who work from home cite a number of benefits, including reduced commuter expenses and increased schedule flexibility. Employers, too, report several benefits, including higher employee retention and reduced overhead expenses. But there are drawbacks—most notably the additional bookkeeping and tax-filing requirements that can arise from people working from home in a state different from the one where their business office is physically located or operates.

If you work from home—or employ people who do—here are four tax issues to be mindful of.

Working from home has afforded a lot of people the ability to move to a new state, and the trend is becoming more common in both metro areas and smaller cities. This can create withholding errors if you don't alert your payroll department right away about your new residence. That's because workers are required to have taxes withheld in accordance with their 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.

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.

The Tax Cuts and Jobs Act of 2017 eliminated many miscellaneous tax deductions, including unreimbursed business expenses, through 2025. 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. (Under previous tax law, workers could deduct certain out-of-pocket work-related expenses that exceeded 2% of their adjusted gross income. The deduction is scheduled to return in 2026.)

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.