How to Handle 2021 Taxes as a Remote Worker


Nexus created by remote-working employees can create significant tax liabilities in new jurisdictions, especially for income tax purposes where the company has significant receipts from the state and the state apportions using a single sales factor formula. According to the so-called convenience rule, employers must report taxes to the state where their organization is based if its employees work remotely out of convenience. You’ll have to rent or buy a property, update your mailing how are remote jobs taxed address or obtain a new driving license to prove you’re no longer eligible to pay income taxes in another state. The potential talent and tax implications of remote work can be significant. A remote employee might work from home in the same city or region where the company office is located, or they may live and work in a different region or country entirely. Each situation can bring its own tax implications, and the onboarding of remote employees requires careful attention.

remote work and taxes

Imagine that a taxpayer purchased $10,000 worth of shares in 2001 and sold them for $20,000 at the start of 2021. Both the federal and state government would treat this as capital gains income of $10,000. The federal government offers preferential rates on long-term capital gains, while most states do not, instead taxing the gains at the ordinary rate. In real terms, however, the gain is far less than $10,000 because cumulative inflation during that period was nearly 55 percent, making the real gain $4,502. Note that inflation indexing of tax codes alone cannot solve the problem of overtaxation of capital gains income, but it can help, and this problem is illustrative of the broader issue. All but five states have significant room to improve on at least one of these eight factors.

Telework and Remote Work FAQs

Because of this, hybrid workers have fewer opportunities to apply for tax exemptions. For example, U.S. employees who perform full-time remote work might have a dedicated space for this, which often qualifies for a home office deduction, reducing the amount you need to pay on taxes. However, hybrid workers are less likely to have this dedicated space, meaning they can’t claim deductions based on workspaces that aren’t permanently for work. So-called convenience of the employer rules allows states to impose income tax on employees, even if they are working remotely in other states if they are employed by a company that is headquartered within their borders. Unless employees live and work in a state with no income tax, they may be taxed twice.

remote work and taxes

If you worked from home as an employee of a company during the tax year, you typically cannot claim home office expenses related to your work. If you were self-employed in some capacity, you could deduct home office expenses. That means you were working as both an employee and a self-employed individual with a side business. Deductions for your home office expenses must be related to your self-employed taxable income rather than income from your employee work.

Top Job Seeker Tax Deductions

For instance, knowing your employee classification often significantly impacts what taxes you pay at the end of the year. W-2 employees have to pay different taxes than 1099 freelancers or temporary independent contractors; exempt and non-exempt employees have differing tax burdens. For remote workers using hybrid models, this situation arises if they commute from their out-of-state residence to the office a couple of days a week. You earn your income in your state of residence—provided you’re working from home.

remote work and taxes

New York intended to finish its phaseout in 2021 but postponed its elimination due to the pandemic. Mississippi is in the process of phasing out its capital stock tax, which should be completely eliminated by 2028. Connecticut is also phasing out this tax by 2024, and Illinois had initially planned to do so as well, though that phaseout has been canceled. These actions will leave only 13 states with capital stock taxes still on the books—and if states want to establish a reputation for encouraging business relocation and in-state investment, those remaining states will act as well.

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