Does Remote Work Impact Your Tax Bill?
Working from home. You no longer spend an hour in your car commuting every day, but your dog always needs to go out when you start an important video conference. Like just about everything else in life, remote work has its pros and cons.
For many people, working from home was a temporary, albeit extended, situation as the U.S. tangled with COVID-19. For context, about 17% of U.S. employees worked from home five days per week before COVID. That percentage increased to 44% during the pandemic. With more businesses allowing working from home, it’s pretty clear that remote work is here to stay.
What Is Remote Work?
When you consider remote work, you might think of your IG feed featuring some influencer on their laptop “working” at the beach. While that post may get a lot of hearts, it is not how most remote work, well, works.
According to the United States Office of Personnel Management, remote work is defined as follows: “Long-distance telework, also referred to as remote work, is a flexible work arrangement in which an employee works most or all of the time from a different geographic area.”
Businesses and their employees must abide by the same state and federal employment laws and regulations that govern in-person, on-site work. Here are just a few examples:
- Employers should ensure that employees receive reasonable accommodations to perform the job’s essential functions in accordance with the Americans with Disabilities Act.
- Employers must follow wage and hour laws.
- When hiring a remote worker, I-9 rules require employers to verify the identity of the employee within three days of onboarding.
Remote Work and Taxes
Similar to a traditional on-site job, you will file your personal income taxes in the state where you reside. This is true whether you are a contractor or a W-2 employee. It is important to understand that not everyone who works from home is considered a remote worker. The official worksite is where the employee would normally work, not their remote location, if they are scheduled to be on site at least twice every biweekly pay period.
The official worksite is an important element on how taxes are paid. For example, your take-home pay may look different depending on where you live. If you work for a Pennsylvania company but your official worksite is your home in Texas, you won’t pay state income tax because Texas doesn’t have a state income tax. However, if you are employed by that same company but work from your home in Pennsylvania, you will pay state income tax. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax.
Living and working in a state that is different from your employer gets more complicated when, for example, you stay and work for six months in a third state because you need to be closer to family. Depending on the details, there can be tax implications in all three states.
No matter how complicated your work and living situation may be, the tax law attorneys at Scaringi Law can determine your tax liability and work to help you avoid an unexpected tax bill.
Pennsylvania’s Tax Reciprocity Agreements
Tax reciprocity is an agreement between states that lowers the tax burden on employees who live in one state but work in another. Reciprocity applies to commuters as well as remote workers. If there is a reciprocal agreement between the home state and the work state, the employee is exempt from state and local taxes in their employment state.
Pennsylvania has reciprocity agreements with the following states:
- New Jersey
- West Virginia
Deductions for Remote Workers
Pennsylvania Personal Income Tax Law allows for remote workers to deduct some expenses that are not reimbursed by their employers. A home office is one of those deductions, but only in qualifying circumstances.
To deduct your home office, the following must be true:
- Your employer does not provide a suitable work area.
- Your employer requires you to maintain a suitable work area away from the employer.
- Your home office or work area must be the principal place you perform your work duties.
- Your home office must be used exclusively for work during the time the home office expense is claimed.
Ramifications of Claiming a Home Office
Before you decide to take a home office deduction on your Pennsylvania income taxes, you will want to keep the following consequences in mind:
- If you sell your home, you will pay Pennsylvania Personal Income Tax on the gain from the sale of your home on the portion of your home that you claimed as a home office.
- You must maintain expense information on taxes, utilities, insurance, mortgage interest, maintenance, etc.
- You must file and pay the 6% state use tax (and applicable local use tax) on the utility expenses claimed as part of the home office deduction.
- There is no longer a federal tax deduction allowed.
- Once you claim a home office, that designation stays with the property indefinitely.
Pennsylvania is one of seven states that provides a deduction for unreimbursed employee business expenses. These expenses are an itemized deduction on state income tax returns. This means the deductions claimed on your return must exceed the standard deduction. Federal deductions were eliminated in the 2018 Tax Cuts and Jobs Act.
Working Remotely Overseas
U.S. citizens must file a tax return in the U.S. no matter where they live and work. Yet there’s a little-known benefit to working overseas: the foreign earned income exclusion. To take advantage of this, you will have to spend at least 330 of 365 days outside the U.S. The other country’s nomad work visa serves as proof of residency. If you are self-employed, you may be able to deduct foreign housing costs. U.S citizens working remotely from another country, generally only owe taxes in the country where you live and work.
Relocating During Remote Work
With more companies allowing employees to work from anywhere, more people are crossing state lines for more affordable housing or to be closer to family. When you move, there can be tax liabilities. In some cases, individual cities and counties have income tax or the equivalent.
In Pennsylvania, most municipalities assess a tax on wages, but that amount varies across the state. Alabama, California, Delaware, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Missouri, New Jersey, New York, Ohio, Oregon, and West Virginia also have cities tax a flat rate and percentage of the income.
Experienced Tax Guidance
The tax attorneys at Scaringi Law know the ins and outs of local, state, and federal taxes as well as the implications of working overseas. If your work location has changed, or you are contemplating a move, you will benefit from consulting with our experienced professionals. Our team understands the tax implications of any major decision that a business or family can make.
To schedule a consultation, contact us online or via phone at (717) 775-7195.