Remote Working and Your Tax Obligations During the Pandemic
The American Institute of CPAs recently provided thoughts to employers and employees on the implications of remote working and tax implications that need to be thought about. We wanted to share the thoughts in this blog posting and as our clients know, our affiliation with the Jacksonville CPA firm of Smoak, Davis & Nixon LLP provides us access to the tax professionals of the firm, to help ensure that all aspects of our client financial life can be addressed at one advisory firm.
As the COVID-19 outbreak continues and states are dealing with increased infection rates, many employers are continuing to encourage or require their employees to work from home (i.e., telework). Such remote working arrangements could potentially have tax implications that should be considered.
State Tax Obligations for the Employer
When an employee works in more than one state, an employer may be obligated to withhold and remit income taxes to each relevant state. In response to COVID-19, some states have issued specific guidance on whether remote employees temporarily working in a state due to the impact of COVID-19 create nexus or a tax obligation for an employer who does not operate in that state.
A company’s responsibilities for withholding state income tax for remote workers is complicated by the fact that states have different thresholds at which an employer must withhold. For example, certain states have rules based on the number of days that a nonresident employee of that state is working that will trigger income tax withholding obligations. Other states incorporate wage-based threshold measures. Also, states’ rules and thresholds for nonresidents’ taxation may differ from the withholding rules. Multi-state tax planning is complicated due to the uniqueness of each states tax rules.
In addition, it is important to understand which state’s unemployment tax will apply. The unemployment tax is paid to only one state, even if the employee works in multiple states. It’s possible to continue paying unemployment tax in the employee’s normal work state if the teleworking is temporary, they expect to return soon, and the employee is still controlled from the normal work state. However, if the employee’s services are localized to the telework state for the foreseeable future, unemployment tax may need to be paid to the telework state.
State Tax Obligations for the Employee
The employee and employer need to track all the employee’s working locations in order to make sure they comply with all state tax obligations. When taxpayers live in one state but work in another, they may have tax liability in both states. Certain tax credits are available to minimize taxation of the same income in two different states. Occasionally, neighboring states have reciprocity agreements which dramatically simplify income tax filing obligations for taxpayers.
Home Office Deduction
Certain taxpayers, such as independent contractors and self-employed individuals, who use their home for business may be eligible to claim a home office deduction. This deduction is available to both homeowners and renters and allows qualifying taxpayers to deduct certain home expenses on their tax returns (thus reducing the amount of a taxpayer’s taxable income). The IRS has very specific rules that must be adhered to in order to claim a home office deduction, with one of these rules being that the space in the home or apartment must be used exclusively for business and have no personal use. There are additional rules that need to be adhered to as well.
Unreimbursed business expenses of an employee, however, including those maintaining a home office, are no longer deductible as miscellaneous itemized deductions for tax years 2018 through 2025 due to the suspension of such deductions by the Tax Cuts and Jobs Act (TCJA).
Although many individual taxpayers are no longer able to deduct work-related expenses as miscellaneous itemized deductions, there remains the ability to receive tax-free reimbursement of work-related expenses, such as for the business use of cell phones and internet services. If a business has established an accountable plan as detailed in Publication 15, (Circular E), Employer’s Tax Guide, it can claim a deduction for employee reimbursements of legitimate business expenses and the reimbursements are not included in the employee’s taxable income. We have suggested to a number of individuals that they go back to their employer and talk about reimbursing them for expenses that they can document and provide an accounting for, to the employer. Sometimes the employer is not interested in taking this approach or changing their policy. However, we think this item and strategy should continue to be discussed with the employer.
Potential Opportunities and the Need for Planning Today
Both individuals and businesses are encountering an uncertain tax landscape in this new teleworking world. If you have questions about how teleworking is impacting you or your business’s tax obligations, please contact us or call our office at 904-396-5831. We appreciate the opportunity to serve you in all areas of your financial life – financial and tax planning, investment and wealth advisory planning, financial product review and evaluation, estate planning and business advisory services through River Capital Advisors and our affiliated CPA firm of Smoak, Davis & Nixon LLP.