Can Working From Home Increase Your Taxes?
If you’ve been working from home for a while, you’re likely used to navigating the various tax rules associated with remote work. But for the many millions of people who transitioned to working remotely during the pandemic, it pays to be aware of some of the potential tax pitfalls of working from home.
One of the potential issues remote workers run into is that not only can the state where you have your primary residence tax your income, but the state where you earn income (where your employer is based) may also tax you.
You could face a higher tax bill if you live in a different state than where your employer is headquartered. In some cases, your state income tax liability may double. If you relocated during the pandemic to work from another state, your tax liability might be affected. Here’s how.
Factors That May Increase Your Tax Bill
If you live in a state that has a reciprocal tax agreement with other states (and your employer is headquartered in a reciprocal state), you may have nothing to worry about when it comes to facing higher taxes. Under a reciprocal tax arrangement, two states agree that your income can be taxed by only one state or the other—either the state where you reside or the state where your employer is based.
Before moving or temporarily relocating to another state to work, check out which states and districts have reciprocal tax agreements. And, see if your home state is one of the several that offer income tax credits to residents who are working in another state.
However, if your employer is headquartered in one of the seven states that use a “convenience of the employer rule” to determine taxes and you live in a different state, you may be at risk of being double-taxed. Keep in mind that your tax risk may just apply to your work-from-home days if you work remotely only part of the time in your residence state and you work in your employer’s state the rest of time. If this is the case, keep track of how many days you work from home and provide a list to your accountant or tax preparer. The seven states that currently use this convenience rule are:
- New York
Your tax liability can be complicated, particularly if you work from home for more than just one employer or as an independent contractor. Again, check with your accountant or a tax professional to see how reciprocal agreements and “convenience” tax rules may impact your tax bill.
What About Temporary Stays?
If you haven’t moved but are just working from another state temporarily during the pandemic, you may be liable to pay taxes to both states. This is especially important to consider if your stay extends beyond several days (many states even impose income tax if you work there for one single day).
Fortunately, these 13 states have agreed not to tax workers who relocate there temporarily due to the pandemic:
- New Jersey
- Rhode Island
- South Carolina
How much (if any) tax you’ll owe for temporary stays in other states while you work remotely depends on the state. Every state has different rules and restrictions, so track your time working in each state and consult with an accountant come tax time.
Working from Home Can Still Save You Money
But there’s good news! A work-from-home job can have a positive effect on your tax bill and overall budget. FlexJobs crunched the numbers and came up with some fantastic ways working remotely will save you money—in some cases, $4,600 a year or more.
Here are just a few of the factors that can impact your bottom line (and maybe even your tax bill) for the better:
- Home Office Tax Breaks. If you deduct your home office, your tax bill could go down. For example, a deduction of $3,000 could lower your tax bill by $750 a year.
- Commuting and Transportation Costs. People who work from home can save as much as $2,000 a year or more on average just by eliminating the cost of gas and car maintenance.
- Eating Out. A few lunches out every week and a cup of coffee here and there can really add up over time—to as much $1,000 or more a year, even if you’re trying to be financially prudent.
- Clothing. Buying a professional wardrobe for work can cost as much as $925, according to our (conservative!) estimates, while dry cleaning and laundering costs can range from $500 to as much as $1,500 a year.
Come Out Ahead
Even if you end up having to pay more income taxes while working remotely from another state, you’re still saving money on many of the expenses that are normally associated with in-office jobs. And, with remote work, you’re gaining the flexibility and work-life balance you need to enjoy every extra penny.
Looking for a remote job? Learn how FlexJobs can power your remote job search.
Disclaimer: This article provides only general information about taxes and does not constitute legal or tax advice. You should not act or refrain from acting based on this article, or any related information on FlexJobs, without first consulting with a legal or tax professional.
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