Along with the many changes that came in 2020, the number of people working from home increased 42%. In the mad dash to get everyone safely and productively set up at home, and not knowing how long the pandemic would actually last, employees may not have stopped to ask, “How will this impact my individual tax return?”
There are several scenarios in which remote work can impact taxes. Personal tax preparation can help you catch all the small details that may fall through the cracks when it comes to transitioning to working from home.
A Change in State Changes Taxes
If you have changed your location at all during the COVID-19 pandemic and while working from home, it is important to verify any effects on your taxes.
For those who live in one state but work in another, working from home opens them up to the possibility of having to file multiple income taxes. If you live in one, and up until the pandemic drove over the state line to work every day, rules for your state may have only required you to file income tax in the state you worked.
Now, if you work for a company in one state and your home office in another, you may need to file state income taxes in both, depending on the tax law of both states.
Special State Considerations
Similarly, if you are temporarily residing in a different state during the pandemic, you may stay long enough (generally over six months) to hold dual residency. This can also require two state tax filings.
If you are lucky enough to live or work in a state that has a tax reciprocity agreement in both states, or simply does not have income tax, you will escape this doubling up on state tax filings.
Some have taken the opportunity to move due to their new work-from-home status. If your home is now in a new state, it is essential to verify with your human resources department that enough tax is withheld to compensate for any tax implications. Sometimes this works in your favor, but be sure to double-check.
Deductions and Reimbursements in your Individual Tax Return
Up until the 2017 passing of the Tax Cuts and Jobs Acts, remote employees could itemize expenses for tax deductions, such as home office expenses and moving for a job. This no longer exists.
Previously, supplies, secondary phone lines and even the space in your home dedicated to your office could be deducted. Now, for traditional W-2 employees, these costs will have to come out-of-pocket.
Many are spending to set up adequate home offices. Unfortunately, there will not be a tax reward for this. However, your employer can get a tax break for outfitting you.
If you need a printer, office supplies or a second data plan to get your work done from home, your employer can reimburse you for these. Then they can get a deduction for paying out reimbursements to you.
Becoming an Independent Contractor in 2020
If you have not transitioned to remote with a company, but rather have decided to begin working from home as an independent contractor, tax implications are more significant.
Independent contractors are not employed by any one company, but rather take on contracted work at their own discretion. This work is completed on an established schedule with supplies typically funded out of their own pocket or as part of the contract.
In 2020, many found the transition to contract work from home to be the best option for themselves and their families until they could safely return to work in-person. Some typical contractor positions workers tackled from home this year include consulting, counseling, accounting, web development work, remote teaching and tutoring, and writing.
Tax Benefits and Losses with Work-from-Home Self-Employment
Working for yourself from home has pluses and minuses when it comes to tax implications. You will need to keep track of your own taxes. If you make over $600 from a particular client, they should furnish you with a 1099 tax form (the self-employed version of a W-2).
Itemized deductions and proration are still available to small business owners post-Tax Cuts and Jobs Act. This means you can deduct your business expenses, including your workspace and prorated internet connection for the amount you use it for work.
For all the benefits this provides, you do unfortunately get hit with the Self-Employment Tax: a 15.3% tax paid on top of your federal and state income taxes. As a W-2 employee, you would have paid half of this into Medicare and Social Security while your employer paid the other half. Now as a self-employed worker, you pay the total amount. You also owe your taxes quarterly as estimated amounts.
Get Your Individual Tax Return Done Right
There’s no doubt that changing to home-based work has caused some complications for out-of-state employees, independent contractors and business owners. Personal tax preparation is essential to ensuring that your individual tax return (which also serves as a business tax return for pass through entities), is accurate during this highly untraditional and transitional year.
Our tax professionals at Stableford Capital can help you address any unusual issues and tax challenges that you may experience as a new remote worker. Consult with us on your individual tax return by calling 480.493.2300 or contact us online for a complimentary 15-minute consultation.