This is part of our educational blog series, “The Short Form,” to simplify taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. issues and explore the world through the lens of tax policy. Learn more about taxes with TaxEDU.
Working from home is great. The tax complications? Not so much.
Last year, 13 percent of full-time employees in the U.S. worked from home and 28 percent worked a hybrid model. Many of them worked in a different state than the one in which their employer was located. That’s millions of Americans who will face complicated income tax situations this filing season—some even getting taxed twice.
Where Is Income Taxed?
Generally, income can be taxed where you live and where you work. If those are the same state—as is typically the case with remote and in-person workers—then that’s where you’ll get taxed (with one exception; more on that below). But if you live and work in two different states—say, you live in New Jersey and commute into New York—then you could get taxed in both.
Thankfully, every state with an income tax offers a credit for taxes paid to another state. The catch: it won’t exceed the amount you pay on that income in your home state. So, your income wouldn’t be double taxed, but if the second state has higher income tax rates, you would be paying more than if you worked exclusively from your own state.
When Would I Be Double Taxed?
Five states tax people where their employer’s office is located, even if they work remotely and never set foot in the state. This is called the “convenience of the employer” rule, and Connecticut, Delaware, Nebraska, New York, and Pennsylvania have it, though they differ on the details.
If your employer is based in one of these states, but you’re working elsewhere for your convenience (not because your employer requires it), then you might pay income taxes both in the state where you live and work and in the state where your employer is based, without an offsetting credit.
For example, say your company is based in New York but you work remotely in California. Because you live and work in California, the state expects you to pay taxes on the income you earn there. But because New York has a convenience rule, it also expects you to pay taxes on the income you earn through your New York-based company. You’d pay income taxes to both states.
What If I Commute across State Lines?
For the hybrid or in-office workers commuting across state lines, tax season could bring headaches. While living in one state and exclusively working in another just means you have to file two income tax returns and receive a credit, splitting your work days between different states means you owe taxes proportionate to the time worked in each state. Calculating that can get messy.
Luckily, there’s a solution—state reciprocity agreements. Under these agreements, neighboring states decide to tax cross-border workers only in the states where they live. There are currently 30 reciprocal agreements across 16 states and the District of Columbia (to see if your state has one, click here).
Not only do reciprocity agreements benefit workers, but they’re also good for states themselves. Higher-tax states can maintain job opportunities while lower-tax states can attract residents—and both would enjoy easier administration and reduced compliance costs for their taxpayers.
Remote and hybrid work arrangements are modernizing the U.S. economy; state policymakers should modernize their tax codes with it.
Note: This post is for informational purposes only and not intended as advice. Please talk to a designated tax professional before making tax planning decisions.
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FAQs
If you have remote employees who reside within the state your business is registered in, you'll need to withhold state income taxes from their earnings and submit state unemployment insurance (SUI) tax in your state. Depending on your state, you may also need to withhold local income tax if their location requires it.
How are you taxed when working remotely? ›
Where do I pay state taxes if I live in a different state than my employer? As a remote worker, you must pay tax on all your income to the state you live in (if your state has personal income tax). This is true no matter where your employer is located.
What happens if I work remotely and my company is in another state? ›
A worker may have tax obligations in any state where they reside and possibly the state where their employer's worksite is located. A permanent remote worker will file their personal income taxes in their state of residence, whether they are a W-2 employee or a 1099-NEC independent contractor.
Are remote workers taxed twice? ›
Unless you live and work in a state with no income tax, you may get taxed twice on the same income. Some states offer a credit that can help offset part or all the taxes you must pay to the state where your employer is.
Is there a tax deduction for working remotely? ›
Are There Tax Deductions for Remote Workers? Since the 2018 tax reform, generally only self-employed people can claim tax deductions for remote work. Some exceptions to this classification include performing arts, government officials, and people who are in the military reserve forces.
How do taxes work for hybrid employees? ›
Tax Implications for Hybrid Payroll
For example, you'll still need to withhold the income tax of hybrid employees like you would with fully remote workers. Still, double taxation may occur for hybrid workers if their home and workplace are in different states.
Are remote workers 1099 employees? ›
If you're a remote employee, your employer should have asked you to fill out W2 paperwork when you first started. This form determines how much your employer will automatically deduct from your paychecks in taxes. If you're an independent remote contractor, you're considered self-employed and a 1099.
What state law applies to remote employees? ›
That means they are subject to the same federal and state laws regarding wages, overtime, breaks, and paid time off. If you work for an employer based in a different state, your rights as a remote worker are generally determined by the laws in the state where you reside.
What states do not allow remote work? ›
State laws
At least ten states—California, Colorado, Maryland, Nevada, New Jersey, New York, Ohio, Rhode Island and Washington—have implemented restrictions that essentially limit out-of-state companies' ability to hire their residents for remote work.
Which states have convenience of employer rule? ›
"Convenience of the Employer" Rules
Connecticut, Delaware, Nebraska, New Jersey, New York and Pennsylvania maintain this "Convenience of Employer" rule. In these states, such employees are taxed in the state in which the employer is located, again unless the employer requires such services to be performed out-of-state.
You may be able to claim part-year residence, which will allow you to divide your income between the two states instead of paying taxes twice. Note that each state has its own rules for determining residency and how you should indicate your status on the tax forms.
How do I know if I'm double taxed? ›
Key Takeaways. Double taxation refers to income tax being paid twice on the same source of income. This can occur when income is taxed at both the corporate level and the personal level, as in the case of stock dividends. Double taxation also refers to the same income being taxed by two different countries.
Which states have reciprocity agreements? ›
| State | States in Agreement |
|---|
| Kentucky | Illinois, Indiana, Michigan, Ohio, West Virginia, Wisconsin, Virginia |
| Maryland | District of Columbia, Pennsylvania, Virginia, West Virginia |
| Michigan | Wisconsin, Indiana, Kentucky, Illinois, Ohio, Minnesota |
| Minnesota | Michigan, North Dakota |
13 more rowsThe internet makes it possible for you to run your own business, and without it, your business wouldn't exist. You can deduct internet costs if you work from home or regularly do business online. Running a business online can include: Acquiring new business or customers through various platforms.
Can you write off electricity if you work from home? ›
The home office tax deduction is an often overlooked tax break for the self-employed that covers expenses for the business use of your home, including mortgage interest, rent, insurance, utilities, repairs, and depreciation.
Can I write off rent if I work from home? ›
The home office deduction is one of the biggest perks that freelancers, self-employed individuals and independent contractors have. If you work for yourself and work from home, you can deduct rent from your taxes.
Is internet a tax write off if you work from home? ›
If you're a W-2 employee and work from home, your internet bill is not tax-deductible. If you're in that position, consider asking your employer about potential opportunities for reimbursem*nt — including expense programs and work-from-home stipends.
What are the best states for remote workers taxes? ›
Which states are best for remote work? For remote workers looking for financial freedom, states with no state income tax such as Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming offer the best opportunity.
Is a remote work stipend taxable income? ›
But work-from-home stipends are considered income. That means that they'll increase your taxable income for the year—so in the end, you'll end up paying taxes on your stipend income.
