Do you enjoy taking your dog for a walk during the day or spending more time at home with your kids? Would you like the ability to work remotely from a second home or another state? There are many reasons more people are opting to work remotely—a trend that does not appear to be reversing anytime soon. But the rise in remote work also puts those employees at risk of a state tax audit. In this article, PYA will shed light on steps remote workers and employers should take to ensure they are following the right rules for the state, or states, in which they may have reporting or withholding requirements.
Questions and Forms—The Basics
When considering working remotely from a different home or state, first consider the following questions:
- Will you be working in a state that taxes income on earned wages?
- If earned wages are taxable, does the state require nonresidents or part-year residents to file a tax return? If yes, what are the filing thresholds?
- Does your state have a reciprocity agreement with another state?
Once you have considered the questions above and decide you want to live in another state or accept a new position with an out-of-state employer, inform HR of the new address in the new state and complete a new W-4 form. Correctly filling out this form will ensure the amount of state taxes withheld from your paycheck is accurate and can limit your exposure to additional taxes, penalties, and interest related to underpayment.
IRS Audit Triggers—Taxpayer Beware
It is important to remember the eligibility rules for taking a deduction for expenses incurred while working from home. The IRS continuously reminds taxpayers that, “Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home.” However, self-employed taxpayers who freelance, have side gigs, or own a business can deduct some expenses, but there are additional risks associated with these types of deductions.
The home office deduction is one of the most common examples. Anyone planning on taking this deduction should consult a tax professional to limit possible exposure. Furthermore, taxpayers should remember that for a business expense to be deductible, it must be ordinary and necessary to your specific trade or business, so make sure to save all receipts and any additional support to substantiate the reason for the expense.
Employer Risks—Compliance Processes Are Critical
An employee is obligated to inform his or her employer of any out-of-state move to ensure correct reporting and withholding. Also, employers can be liable for failing to remit unemployment insurance to a state. In some states, just having an employee working there could cause the employer to owe insurance. When an employee relocates to another state, the employer should make sure to review the new state’s liability requirements for remitting unemployment insurance.
As one can see, there are many decisions and unseen complexities taxpayers can face in working remotely or from a second home or another state. Even when following all the proper steps, employers and remote employees will likely face additional IRS scrutiny.
If you have questions about employer taxes, employee remote work, or IRS audits, or if you would like assistance with any tax planning and strategy matter, one of our executives will be happy to assist. You may email them below, or call (800) 270-9629.