Are you still working remotely due to the COVID-19 pandemic? If so, you may not ever get back into the office full-time.
The pandemic has drastically shifted workforce trends. According to a recent research by McKinsey, a whopping 80 percent of people reported they enjoy working from home! Nowadays, employers are anticipating a shift to what they are calling a hybrid workforce permanently. In a hybrid workforce, most employees would work remotely at least part of the time, and some permanently.
If you are one of those employees hoping to make working remotely a permanent arrangement, there are some things you should know in advance. Primarily, you should know how working from anywhere can affect your tax situation.
Tax Implications of Working From Anywhere
It’s a common misconception among remote workers that they can work anywhere and only pay taxes to the state where their main office is located. This is, of course, not true. Assuming you plan to stay within the United States as a remote employee, you will have a variety of tax implications to think through.
While your federal income taxes won’t change depending on where you live, your state income taxes can change. If you live in the same state where you work, then the tax implications are minimal. However, if you live in a different state than where you were previously going to work, you will encounter what’s called a tax nexus.
A tax nexus is a term used in tax law to describe the relationship between a company and their tax presence in a state. It draws the line between which state businesses pay taxes to, depending on their physical presence.
Before working from home was a common thing, employers typically just had to pay taxes from where they were located. Employees also paid taxes based on their physical locations. Nowadays, tax nexuses are dependent on where employees live, even if their formal office is in another state. Essentially, an employee’s home office can be considered an additional office location for the business. The company likely will have to pay taxes in that state, even if only one employee lives there.
For remote employees, this means they could be subject to non-resident income tax as well as tax withholding from the state where they live. To note, the regulations differ from state to state, so be sure to research the state’s laws of where you live versus where your company is located.
Tips for Filing Multiple State Tax Returns
Overwhelmed? Don’t be. We are here to help! With a little guidance, filing multiple state tax returns is easy as one-two-three.
To start, consider where you have lived this year, either part-time or permanently. Also make note of any states where you own additional property, such as a vacation home. Finally, make note of where your employer is located.
Next, determine your residency in each state. There are three types of residency – full-time resident, part-year resident, and non-resident.
Let’s start with the easy one – full-time residency. You are a full-time resident of a state if your main home is in that state, and you spent more than six months living there. If your employer is also based in that state, and assuming you didn’t move states part-way through the year, you only need to file a tax return for that state.
To be a nonresident is also fairly straight-forward. You are a nonresident of a state if you received income from that state, but did not live there for any part of the year. An example would be if you lived full-time in Oregon but worked remotely out of California. You are then a non-resident of California, but a full-time resident of Oregon.
If neither of these examples fits your personal situation, then you may fit into the third category of being a part-year resident. An example of this is you started the year living in California, but moved to Oregon permanently part-way through the year.
The key to determining your residency is justifying how permanent (or not) a move was. If you intend to make a permanent move, you will need to have documentation to prove it. Such documentation may include, but isn’t limited to, a new driver’s license for the state, registering a vehicle in a new state, or registering to vote in a new state.
TaxAct Can Help
If you find you need to file multiple state tax returns, the best thing you can do is to utilize tax software such as TaxAct. It will walk you through each scenario to determine what you need to file depending on your situation. You don’t have to file taxes alone! We are here to make tax season easy for you.