Tax Implications of Working From Home

Ah, 2020.  The year that so much changed – or at least accelerated some of the trends I’ve seen over the past decade or so, including the option to work from home.

I have discussed working from home as an upcoming trend for years before 2020.  I’ve worked remotely for about 20 years or so now, and I still see this as an ongoing benefit.  It has certainly been incredibly valuable to me and to my staff.

The state tax systems, and the courts, will have to play a bit of catch up to deal with the increasing number of remote workers, however.

Prior to 2020, employers monitored employees’ locations when the employees were working remotely.  This was due to the need to pay taxes to the proper jurisdictions.  For those in the NorthEast, which is mostly very small states (not so much in the West, where the states are larger), taxes would have to be split up into various jurisdictions.  It was a bit of an administrative nightmare, but not many people were working remotely before March 2020 anyway.

Now the taxation paradigm has been forced to shift.  Employers who were dealing with the specific challenges to remote work began notifying state tax authorities of the difficulties of suddenly working with multiple locales and jurisdictions.  So the states waived some of the tax obligations.

Then it was realized that remote working was convenient for a lot of employees – and is probably around to stay.  I know, it’s shocking to think that at least some people want to avoid commutes and enjoy the benefits of remote work, at least some of the time.

So let’s discuss how the taxation mess happens.

A majority of US states have laws that indicate that if an employee works from within a state, it gives the employer “nexus” status for tax purposes.  This means the employer then has to comply with the state’s tax reporting requirements, including income tax withholding, sales taxes, payroll taxes, and so forth.  This is great for the employee, only having to deal with their home state, and good for the state in which nexus status is granted – they get the tax revenue – but a challenge for the employer.

We are still not sure how this is going to continue.  Some states have waived rights to collect income tax from in state remote employees.  Most have decided not to inflict punitive measures on employers since the states themselves were demanding these measures.  However, what happens next?

States want to reimpose the taxes on the employers due to budget shortfalls, so they may well want to reimpose those protections.  Employers may need to consider some of these issues when determining work policies moving forward.

Donna Harris holds a BSci in Accounting and is the owner of Bookkeeping Made Simple.  She is currently working on her MBA.