What Remote Workers Need to Know for Tax Season
In recent years, the remote work revolution has skyrocketed, with the number of people working from home tripling, according to the U.S. Census Bureau. While the freedom and flexibility of remote work are undeniable perks, they also bring a slew of complexities regarding taxes. Depending on where you work, you may find yourself tangled in a web of tax codes from different states and cities.
As tax season approaches, it’s crucial for remote workers to be well-informed about the intricacies of their tax obligations. We’ve gathered expert advice to help remote workers navigate the tax terrain successfully.
Should Remote Workers Use Tax Preparation Software?
Tax preparation software offers an affordable way to streamline the tax-filing process. However, it’s important to remember that the software only knows what you tell it. Be diligent in inputting all necessary information for an accurate filing. Chika Obih, a CPA and Tax Strategist, suggests that if you’re working in a state different from your residence, especially in your first year, consider hiring a tax professional.
This initial guidance will provide you with a basic understanding of your tax situation, making future filings more manageable.
Home Office Deductions: Know the Rules
One common misconception is that all remote workers can deduct home office expenses. However, eligibility depends on your employment status and how you use your workspace. For employees who receive a W-2 exclusively from their employer, the 2017 Tax Cuts and Jobs Act suspended home office deductions through 2025.
Even if you work from home full-time, you can’t deduct work-related expenses to reduce your taxable income. But there’s a workaround—ask your employer to reimburse you for office expenses or co-working space fees. Business owners and freelancers receiving a 1099 form may be eligible to deduct home office expenses, but the space must be used exclusively for business purposes.
The deduction can be calculated using either the simplified option or the regular method, depending on your actual costs and the size of your workspace. Simplified Option: Deduct $5 per square foot of office space, up to 300 square feet ($1,500). Regular Method: Keep records of eligible home office-related expenses, such as homeowners insurance, mortgage interest, utilities, and repairs. Deduct a percentage of these expenses based on the size of your workspace. The deduction cannot exceed your business’s net income.
Understanding State and Local Tax Codes
Remote workers residing and working in different states must pay close attention to state and local taxes. Typically, you pay taxes in the state where you live, unless that state doesn’t have income taxes. However, if you work in a different state, you’ll likely need to file a nonresident tax form for the state where you worked.
To avoid double taxation, you can credit the taxes paid in your non-resident state against your home state’s tax liability. Keep in mind that state and local tax codes can be incredibly complex, varying not just by state but also by county and city.
For precise guidance on your state and local tax obligations, consider consulting a local tax professional. Their expertise can help you avoid overpaying or underpaying your taxes.
Digital Nomads: Seek Professional Assistance
Digital nomads, who frequently move between locations, should consider professional tax assistance. Depending on where you lived, the duration of your stay, and your income, you might owe taxes in multiple states and cities. Consulting a tax professional can provide peace of mind, ensuring compliance with local and state tax codes, preventing potential issues in the future.
Track All Work-Related Expenses
Independent contractors, freelancers, and the self-employed who receive a 1099 form for their income can deduct business expenses. Beyond home office expenses, it’s essential to keep a record of all work-related costs. Track expenses related to business travel, including mileage, and allocate a percentage of your phone and internet bills for business use.
Detailed record-keeping is essential, and it’s advisable to keep itemized receipts. Don’t be overly cautious about taking legitimate deductions; fear of an audit shouldn’t deter you from claiming eligible tax credits and benefits.
Know Before You File
The surge in remote and hybrid work since the start of the Covid-19 pandemic has made understanding your tax obligations more important than ever. For W-2 employees, remote work might have minimal tax impacts, but it can become complex in certain situations. If you live and work in different states or if you’ve moved around during the year, you may need to file state and local taxes in multiple jurisdictions.
Taxation can be perplexing, especially for remote workers, so if you’re unsure about handling your taxes this year, consider working with a tax professional. Their expertise can help you save money and provide peace of mind during tax season.