How Does Working Remotely Affect Taxes? [2023 Guide]

While the masks are (mostly) off, the hybrid workplace isn’t going away anytime soon. Working remotely gives employees a sense of freedom.

However, tax season in April can get confusing.

Consider an employee who works for a company in the Bay Area but lives in New York and works for a company with headquarters in California. They stayed with their parents in Arizona for a few months to escape the winter, working remotely from their backyard.

So, how does working remotely affect taxes?

Although this employee’s domicile is in New York, they temporarily resided in Arizona for over 60 days, triggering its income tax rule. Now, depending on how their California-based company handles the payroll, they might have to file three state tax returns.

These sorts of situations are precisely why it’s important for remote and hybrid employees to understand how working remotely affects taxes. Knowing the rules (and how to avoid needless taxation) can help you save on your returns come tax season.

Quick Answer: When you work remotely, your taxes may be affected depending on the state you live in and the state where your employer is based. Generally, you will pay income tax to your state of residence, but if you work for an out-of-state employer, you may also need to file taxes in the state where your employer is based.

There are five key tax concepts remote workers should be aware of to avoid needless taxation, save money on their taxes, and adhere to all the rules. These include:

1. State tax residency
2. Double taxation
3. Reciprocal tax agreements
4. The convenience of the employer
5. Tax deductions for remote work

This article will help you understand how working remotely affects taxes by covering key concepts, like double taxation and tax deductions, and providing answers to commonly asked questions about remote tax filings.

How Does Working Remotely Affect Taxes?

Since the start of the COVID-19 pandemic, remote work has become a mainstay of the modern workplace. For many workers, the ability to work from somewhere other than the office (such as these remote working spaces) offers a new level of freedom and convenience.

Working for a U.S. company means that you will be taxed both federally as well as by the state (or states) where your work takes place.

No matter your unique situation, common factors, such as tax residency, reciprocal tax agreements, and the convenience of the employer, will affect how you file your state returns.

A bit of research on the state or states in which you intend to work remotely can help you save time and money. In fact, working from a zero-tax state or avoiding residency in a high-tax state can mean a difference in hundreds (or even thousands) of dollars in taxable income.

While the 2018 Tax Cuts and Jobs Act made filing taxes simpler for millions of workers, it also took away certain deductions for remote workers that many new to the hybrid workplace often take for granted.

While certain deductions still stand, the “home office” is now considered an extension of the standard office.

For fully remote and hybrid workers alike, the rule of thumb follows that state taxes apply in the state in which the work is performed. Double taxation is rare (we’ll cover this below), but hybrid workers often face dealing with state withholdings when their home and office are in different states.

5 Tax Concepts Remote (and Hybrid) Workers Should Know

Whether you’re considering working remotely full-time or are deciding on your next remote work location, understanding the tax concepts below will allow you to save on your taxes by helping you make more informed decisions.

Determining how working remotely affects your taxes could also help you determine where — and for how long — remote work makes sense for you.

1. Each State Makes Its Own Tax Rules

You become a state resident for tax purposes when you live in that state for a certain amount of time — in most cases, half a year (183 days). Each state has its own tax rate, residency rules, and set of forms for filing taxes.

Remote workers moving from a no-income-tax state, such as Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming, to a state that taxes income will see the largest difference in their taxes if they don’t adjust their withholdings correctly.

It is important to note that your home state — where you are domiciled — won’t change if you move states to work temporarily.

Unless you move your home (and change state residency), you might face tax liability in both your home state and the state where you worked as a tax resident.

Certain states have reciprocal tax agreements (more on these below), and others (Arizona, California, Indiana, Oregon, and Virginia) allow reverse credits, which you apply in the work state return from the home state.

Let’s say Sarah works for a company in the Bay Area but lives in New York. Because she triggered Arizona’s tax residency by staying for more than 60 days, she has to file state income taxes in both NY and AZ — in her case, California doesn’t require her to file as a non-resident remote worker.

Key takeaways:

• Tax rates, laws, and residency rules vary state by state
• Only eight states are free of income tax
• You are required to file a state tax return in states where you earn income, but only the state in which you live permanently can tax your income as a whole

2. Living in One State and Working in Another Could Mean Double Taxation

Double taxation means paying taxes on your income twice — both in your home state and wherever you work.

Those who work remotely from abroad can be liable to pay taxes at home and in their host country, depending on the country, their visa, and whether they have a local bank account.

Luckily for remote workers in the U.S., a 2015 Supreme Court ruling forbids double taxation by states on the same income. What this means is that while you will be taxed twice, you can request a refund. H&R Block recommends filing your non-resident return first.

When you file your non-resident tax return, the withholding should only be applied to income earned while in that state.

After that is calculated, you can apply the amount on your resident state tax return — claiming a tax credit for taxes paid out of state.

Suppose John lives in Colorado but works in Pennsylvania for seven months, earning 120K per year.

He triggers PA residency laws by staying for over 184 days. Because there is no special agreement between these states, John will pay PA income taxes (3.07%) on 70K, or $2,149. Colorado will levy 4.4% on his total income ($5,280), though John can subtract the amount he paid in PA from that total.

When in doubt, check IRS state pages for state-related tax information to help you when claiming credit for taxes paid out of state.

3. Discover Whether Your State Has Reciprocal Tax Agreements

Some states have reciprocal state income tax agreements, allowing workers to travel to a neighboring state for work without having to pay taxes there.

Reciprocal agreements are common between states with a large commuter population, such as the DC and Chicagoland areas.

These agreements are intended to make taxpayers’ lives easier come tax season.

While double taxation is forbidden in most cases (read on to learn when double taxation can apply), those who work and live in different states often need to file two separate state returns — these agreements make it easier for employees by letting the employer settle taxes on their behalf.

For states with reciprocal tax agreements, workers will need to submit a form to their employer to file taxes for them. Each state has its own exemption form and procedure for filing with the state’s tax agency.

Pennsylvania has reciprocal tax agreements with Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia. This means that a resident of Ohio will be exempt from state income tax in PA if they submit Form REV-419 to their Pennsylvanian employer.

4. The Convenience of the Employer Rule Could Mean Twice the Tax Obligations

While the Supreme Court rules against double taxation, the fine print reveals that it is allowed under certain conditions — for remote workers, under the convenience of the employer rule.

The rule arose as remote work gained popularity in recent years and hinges on the reason employees work remotely from home — either because it’s an employer requirement or because it’s easier for them.

Due to the increased number of employees working from home, the introduction of the convenience rule made it easier for employers to manage a remote workforce.

Connecticut, Delaware, Nebraska, New York, and Pennsylvania use the convenience rule — however, bear in mind that some states, like Connecticut, Massachusetts, and New Jersey, have their own versions of it.

To avoid double taxation, remote workers need to prove that their employer directed them to work out of state (i.e., from home) for its convenience.

This can be done by proving the following:

• Your home office contains facilities/equipment necessary for the job that your employer hasn’t provided
• You use your home to meet with clients or conduct core business on a regular basis
• Your employer hasn’t provided you with a dedicated workspace or facilities at any of their locations

Employers should be aware of the convenience test to properly manage a remote workforce. OfficeRnD Hybrid is a hybrid work management solution that integrates with tax software like Quickbooks to simplify employee tax reporting.

5. There Are Tax Deductions Unique to Remote Workers

Prior to the Tax Cuts and Jobs Act of 2018, employees who worked from home could claim the home office deduction when filing taxes.

While legislators who passed the act couldn’t have known about the upcoming pandemic and the resulting change to workplace norms, remote employees are no longer able to claim this deduction.

With that said, freelancers and self-employed people with a dedicated home office can still claim the home office deduction.

W2 employees with a side hustle can also pass the home office deduction test if — and only if — the space, equipment, and supplies in the home office are used exclusively for that purpose.

Several other deductions are available for W2 workers. Here are a few examples:

• For those required to travel for work, mileage and travel expenses are deductible if they are not reimbursed by the employer.
• Work-from-home teachers are also eligible for a $250 deduction to cover computer equipment and teaching supplies.

Here are some tips for getting the most from deductions:

• If you’re claiming the home office deduction, make sure to keep a careful record of your receipts.
• Explore the simplified home office deduction as a way to simplify recordkeeping.
• Choose the direct method if it offers a larger deduction, and switch between the two each year.

Plan Remote Work with Taxes in Mind

As the hybrid workplace has become the norm, both employees and employers must be aware of how working remotely affects taxes.

While certain states practice reciprocal tax agreements, workers who spend part or all of the year working outside their state might need to file multiple tax returns.

Double taxation usually won’t apply unless employees fail to demonstrate they are working remotely for an employer’s convenience. As of 2018, people working from home for an employer are no longer eligible for the home office deduction — unless they also work as freelancers or have their own side business.

It can save time and money to consult a tax expert on your unique tax situation. Employers should understand how their policies might affect hybrid employees’ taxes while tracking expenses to ensure accurate reporting.

Get started for free with OfficeRnD Hybrid to manage a hybrid workforce while seamlessly integrating your tax accounting apps.

Disclaimer: Even though this article was fact-checked, it is intended for educational purposes only and does not constitute legal or financial advice. Please consult a tax specialist or tax attorney for more information on taxation laws in your state, province, or country.

FAQ

Do I Have to Pay Income Tax If I Work Abroad?

Yes, U.S. citizens or resident aliens working abroad are subject to income tax. You may also be liable for country-specific taxes if you work for a foreign employer. However, foreign-earned income exclusions and housing deductions can apply.

How Do Taxes Work When Working Remotely Out of State?

If you trigger tax residency in another state with income taxes, you will owe taxes there. You can deduct taxes withheld in another state on your home state return.

How Long Can I Work Remotely in Another State?

For most states, you become a tax resident after living there for 183 days. While there is no limit on the time you can stay there, your residency state will continue to be wherever you have your domicile (primary residence).

Do I Have to Pay State Taxes If I Work Remotely?

You will always be subject to state income laws where you are a resident. Depending on factors like tax residency, reciprocal agreements, and the convenience of the employer rule, you may also be liable to pay state taxes elsewhere.

What Are the Advantages and Disadvantages of Working Remotely From Home?

While remote work can make paying taxes somewhat complicated, it offers the potential for greater flexibility, improved work-life balance, and cost savings due to not having to commute.

Are you Double Taxed if you Work Remotely?

When a person lives in one state but works in another, they may have tax liability in both states, but typically receive a tax credit to eliminate double taxation of that income. To avoid double taxation, most states offer a credit for taxes paid to other states on earned income.

Do you Pay More Taxes Working from Home?

Whether or not you pay more taxes when working from home depends on various factors, such as your location, employer’s location, and the specific tax laws of the states involved. While some states have implemented a work-from-home tax to make up for lost revenue due to remote work, others have passed laws to prevent double taxation of remote workers. Additionally, some expenses related to working from home may be tax-deductible, but this also depends on the specific tax laws.