During the pandemic, many employees transitioned to remote work, and for many, this setup has continued. Remote work offers numerous advantages for both employers and employees, making it a lasting trend in many industries. However, it can also lead to tax complications, especially when employees work across state lines.
The Risk of Double Taxation
It’s common for employees to work remotely for a company based in another state. For some businesses, remote work is now a permanent arrangement, allowing employees to live far from the office.
If you live in one state but work remotely for an employer in another, it’s important to understand the tax laws in both states. In some cases, you may need to file income tax returns in both, potentially leading to higher taxes or even double taxation.
The core issue is that states typically have the authority to tax the income of individuals who are either domiciled or residing there. Domicile refers to a person’s intention to make a place their “true, fixed, permanent home,” while residency is determined by physical presence in a state for a certain period (often 183 days per year).
It’s possible to be domiciled in one state and a resident in another. For example, if you have a permanent home in one state where your job is based but spend more than 200 days a year working from a vacation home in another state, you may be considered domiciled in your home state and a resident in your vacation home state. As a result, both states could tax your income. Double taxation might be avoided if one or both states offer credits for taxes paid to other states, but your tax bill could still rise if one state’s tax rate is significantly higher than the other’s.
Employer Challenges
From an employer’s perspective, allowing employees to work remotely can create tax obligations in multiple states. Employers may be required to withhold and remit income and payroll taxes in each state where their employees are working.
Additionally, having employees in different states can create "nexus," which could trigger liabilities for state taxes such as income, franchise, gross receipts, or sales taxes. These requirements not only increase administrative burdens but may also lead to higher overall tax liabilities.
Business Expense Deductions
Current tax law doesn’t allow employees to deduct unreimbursed work-related expenses. In the past, certain expenses could be deducted as miscellaneous itemized deductions if they exceeded 2% of adjusted gross income, but this provision was eliminated for tax years 2018 through 2025.
Remote workers are generally ineligible for the home office deduction, which primarily applies to self-employed individuals. Before 2018, employees could claim the deduction if working from home was for their employer’s convenience, but this deduction was also suspended for the same period.
Employers can, however, reimburse remote workers for business-related expenses under an “accountable plan.” To qualify, employees must provide proper documentation of their expenses, and if the requirements are met, these expenses are deductible for the employer and excluded from the employee’s income.
Stay Informed
Whether you’re a remote worker or an employer with remote staff, it’s crucial to understand the tax implications. In some cases, there may be ways to minimize the impact, but even if not, being aware of the potential tax outcomes will help you plan accordingly.