With the onset of the Covid-19 pandemic, many employees have turned to working from home. This has created some questions regarding the taxation of remote workers, as well as possible tax deductions.
Employee vs. Self-Employed
Understanding your status as an employee or self-employed worker is vital to answering any tax question. The main indicator of your status is if you receive a W-2 at year end. This tax document will consist of federal and state wages, tax withholdings, Medicare withholding and benefits. If you received this document, you should consider yourself an employee.
If you are self-employed, you should have filed a Schedule C in previous tax years if this is a continuing business. If your business is new for this tax year, you should have registered your new business with your respective home state and provided information on sales, expenses, and start-up costs to your accountant.
Remote Work & State Taxes
You may be wondering what the tax implications of remote work are. As a taxpayer you should expect to be taxed first by your resident state. To determine your resident state, a simple rule of thumb is to use your personal mailing address, thought these rules do vary though from state-to-state so be sure to check on your state’s residency rules.
If you are an employee, you will find any taxes for additional states on your W-2 in box 15. Additional state taxes could be due depending on where your employer is incorporated, as well as local and state laws, such as with New Jersey residents working in New York City or Philadelphia. Local laws in these cities could have added tax implications for remote workers relating to a nonresident state.
When filing your taxes, you should take note of any other states listed on your W-2. In most cases this will require the taxpayer to file a tax return in multiple states, however some states, such as New Jersey and Pennsylvania, have laws that will give the taxpayer a credit for taxes paid to another state. This will either help you avoid double taxation or reduce your total tax liability.
What Deductions Can I Claim When Working from Home?
The Tax Cuts and Jobs Act suspended the business use of home deduction from 2018 through 2025 for employees.
For self-employed taxpayers there are certain deductions you can claim when working from home, including home office expenses, mortgage interest, utilities, real estate taxes, casualty losses, insurance, depreciation, maintenance, and repairs, among others. The IRS provides specific qualifications to be eligible for these deductions. To qualify, the part of the home being claimed must meet one of these criteria:
- Be used exclusively and regularly as a principal place of business for a trade or business.
- Be exclusively and regularly used as a place where patients, clients or customers are met in the normal course of a trade or business.
- Be a separate structure that is not attached to a home that is used exclusively and regularly in connection with a trade or business.
- Be used on a regular basis for storage of inventory or product samples used in a trade or business of selling products.
- Be for rental use.
- Be used as a daycare facility.
When claiming the business use of home deduction there are two methods: the regular or the simple method. The regular method allows the taxpayer to determine the deduction by dividing expenses of the operating home between business and personal use. With the simple method, the taxpayer is prescribed a rate of $5 per square foot for the business use of home. This is however only allowed when the business space is 300 square feet or less.
Important Information for Remote Workers
There is a difference between self-employed remote workers and employees who work remotely. Check in with your employer and find out your status as soon as possible if you are unsure. Positions that are considered remote will only require taxes be paid to your resident state. If your position is not considered remote and you’re a work from home employee, you might have to pay state income tax where your employer’s place of business is located i.e., a New Jersey resident who worked in NYC before the pandemic but has since worked from home will have to pay NYC wage tax.
If you’re planning to take deductions for working remotely and qualify under IRS rules, be sure to keep detailed logs and receipts for all expenses to protect yourself from any potential IRS audits.