With so many workers going remote and staying that way, their approach to doing taxes may be changing. Whether you work for a small mom-and-pop or a large, multistate company, being a remote worker can add an extra layer of difficulty to your income tax filing.
Knowing the ins and outs of the tax code and how it applies to remote workers can be daunting. A whopping 51% of Americans worked remotely at one time or another between April 2020 and April 2021. This onslaught of new remote workers will lead to many people tackling income taxes for remote work for the first time.
Here are some tips to assist remote workers in navigating their 2021 taxes.
It Matters Where You Are
One of the most appealing aspects of remote positions is working anywhere you’d like, as long as there’s reliable Wi-Fi. Many people who found themselves working remotely took the opportunity to relocate to low-tax states or areas that better suit their lifestyle, such as the beach or mountains.
Thirty-two states have graduated income taxes similar to the federal income tax. Ten states have a flat income tax, and nine states have no income tax at all.
Location also matters when considering companies with central locations that employ remote workers across the United States. Because taxation of remote workers is still in its relative infancy, some states are still adjusting to nonresident remote workers employed by out-of-state companies.
Typically, the rule is that employees pay taxes based on the state where they reside. However, remote work has grown in popularity so much that states are starting to become concerned about the lost revenue that comes with employees leaving high-tax states in favor of low-tax states. Some are reevaluating the rules to see if they can recoup lost revenue.
Currently, there are seven states where workers incur a tax liability from their state of residence and the state where their company is located: Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania. This “double taxation” of sorts has led some workers to flee these states in favor of states with low or no state income tax, such as Florida. Many states, however, provide a credit to make up for double taxation.
Some states that had pandemic-related moratoriums on tax obligations for remote workers who were traveling state to state, or staying temporarily in certain states, ended those exceptional breaks for 2021.
Deductions and Tax Implications for Home Offices
The pre-pandemic Tax Cut and Jobs Act of 2017 ended some deductions that remote workers enjoyed when they set up their home offices. Miscellaneous itemized deductions were ended for the majority of remote workers, such as deductions for desks and computers. While contract and self-employed workers can still take some home-office deductions, this pre-pandemic act left a lot of new remote workers out in the cold.
Workers who use 1099 and Schedule C forms, as well as sole proprietors, can still take advantage of deductions for their home office setups.
Education and Preparation
In these uncertain times, it’s essential to educate oneself on the changing tax rules and prepare for filing, giving plenty of time before the deadline.
A recent Harris Poll showed that many people are “not very” familiar with the tax laws in their state of residency or the state where their employer is located. Taking time to read up on the tax implications of remote work will help to stave off frustrating hiccups down the road.
The onus is on the taxpayer to know the rules as they apply to them, where they need to pay taxes, and how much. Given the growth in popularity of remote work, it’s very possible that tax law could change in the next few years to accommodate the changing workforce. Several bills under consideration would change the way remote workers are taxed based on their location. The Remote and Mobile Worker Relief Act of 2021 would not let states tax or require withholding on nonresident employees who are in a state for less than 30 days. A similar bill called the Mobile Workforce State Income Tax Simplification Act of 2021 is pending in the U.S. House of Representatives.
Finding the Right Professional for The Job
One of the most important things in properly filing taxes as a remote worker is enlisting the help of a qualified tax professional to assist in filing. Given the ever-changing tax landscape, this may not be the year to rely on free tax software.
Ensure that anyone you hire has a Preparer Tax Identification Number, or PTIN. Any tax professional preparing income tax returns for compensation needs to have this number. PTINs are relatively easy to come by, so it also behooves you to find a tax professional with credentials or years of proven experience. The IRS directory is a good place to point you in the right direction. Look for professionals who belong to prestigious professional organizations or come highly recommended by sources you trust.
Price can also be a factor when hiring a tax professional for this most unconventional of filing years. The price of tax preparers can vary wildly, and it may be beneficial to fork over a bit more than you typically do for someone who knows the new guidelines and can adequately file your remote-worker return. Doing your due diligence when hiring a true professional will give you peace of mind in the long run.
The deadline for filing for the 2021 tax year is Monday, April 18, 2022. This deadline gives remote workers plenty of time to get their necessary paperwork gathered, consult the help of a professional, and prepare to file their return correctly.
The Covid-19 pandemic has irreversibly altered the working world, as going remote has gone mainstream. While it remains to be seen how the tax law will change in the wake of the pandemic, one thing is certain: Remote work is here to stay. Learning how to file a tax return as a remote worker is sure to benefit the majority of workers going forward.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Bryan Cannon, CFP, LUTCF, is CEO and chief portfolio strategist at Cannon Advisors. He has more than 25 years of investment and financial planning experience.
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