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Working From Home? Beware These Tax Issues

Working From Home? Beware These Tax Issues

Even before the coronavirus pandemic, the share of America’s labor force working from home had been on the rise. Between 2005 and 2018, the number of people who regularly work from home increased 173%, while the number of employers who offer the option of working from home is up 40% from five years ago.

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 potential tax consequences that come from an employee living in a different state than the one in which their employer is headquartered.

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

1. Tax withholding from wages

Working from home has afforded a lot of people the ability to move to a new state, but it can also create withholding errors if you don’t alert your payroll department right away of 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.

Of course, this is an issue for anyone who lives in one state and works in another, which is a common occurrence in big metro areas like New York and Washington, D.C., as well as smaller cities like Spokane, Washington.

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 the employee is working from another state for the employer or employee’s convenience.

2. Filing returns in multiple states

If you worked in two or more states this year, 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 will not be required to report and pay income tax to that state.

3. Deducting business expenses

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.

4. Employing workers in multiple states

If you own a business in one state but have employees 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.

The bottom line

Taxes are always complicated, but this year’s unprecedented 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.

What You Can Do Next

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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