Remote Work | Blue Ridge Wealth Planners
Published on March 2nd, 2021
The pandemic that started in 2020 accelerated a popular work trend that had not been widely embraced by employers before then: working from home (WFH). According to a recent survey by SmallBizGenius, 4.3 million remote workers in the U.S. have an arrangement where they work from home at least half the time. While that only constitutes 3.2% of the entire workforce, it is a 140% increase since 2005.1
Unfortunately, the physical location of where an employee works may change how payroll taxes are imposed. This can be a problem if you work from home, but your employer is in another city or county where local taxes are collected. It’s an even bigger challenge if you live in another state. For every out-of-state employee who works from home, the employer must register and withhold income taxes for those state and local agencies.2
The tax situation is also challenging when an employee commutes from one state to another to get to work, even if it’s just a few miles away. Technically, the worker has to pay income taxes in both states — where he or she works and where he or she lives. However, many states have a reciprocal agreement wherein the employee pays taxes only in the state where the company is located. In states without this agreement, the employee may have to request a tax credit to avoid paying a double tax.3
As we approach tax season, bear in mind that working from home and other new issues raised by the pandemic can be challenging. We recommend you work with an experienced tax advisor to help ensure your taxes are completed properly. If you need a referral, we may be able to recommend one from our network. In addition, keep in mind that many insurance products have tax advantages that can alleviate tax headaches, particularly during retirement or as part of your legacy planning. Please reach out if you’d like to discuss options.
In April 2020, 69% of U.S. employees worked remotely. Because so many companies deployed workers to their homes in 2020, many states offered a tax-filing reprieve for remote workers who worked temporarily out of state. However, that reprieve is, for the most part, over for 2021 tax filing.4
The general rule is that the state where you reside gets to tax your wages, regardless of where you earned them. Yet every state is different. Some let you reside there for 30 to 60 days before any income tax obligation kicks in, but for others, your taxable income starts on day one. While employers may be following tax-withholding rules based on where you reported working from, it’s up to taxpayers to be familiar with those state tax laws to find out if they need to file multiple tax returns. And if you work as a 1099 contractor, it’s up to you to report where you were when the income was earned.5
Employees who work for companies in another state but live in Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York or Pennsylvania will incur the double income tax liability. It’s important for remote workers to request that their employers make the proper state withholding and establish a bona fide office at that teleworking location to avoid paying additional taxes.6
Should you become a “digital nomad” and move to another country to work remotely, U.S.-based income will still be taxed by the IRS. However, if you live and work outside of the U.S. for a year or more, you may qualify for an exclusion of up to $112,000 in foreign earnings on your 2022 income tax return. Bear in mind that if you maintain a U.S. residence, that state also may levy taxes on your income.7
The message is simple — 2021 tax filings may be more challenging this tax season for remote workers. It’s a good idea to consult with an experienced tax advisor to help ensure you follow the proper protocols and procedures.
Content prepared by Kara Stefan Communications.
1 Dragomir Simovic. SmallBizGenius. June 11, 2021. “The Ultimate List of Remote Work Statistics – 2021 Edition.” https://www.smallbizgenius.net/by-the-numbers/remote-work-statistics/#gref. Accessed Dec. 23, 2021.
2 APS. June 22, 2021. “How payroll taxes for remote employees work.” https://apspayroll.com/blog/payroll-taxes-remote-employees/. Accessed Dec. 23, 2021.
3 Ibid.
4 Sarah O’Brien. CNBC. July 18, 2021. “Still working remotely? Your 2021 taxes may be more complicated than your 2020 return.” https://www.cnbc.com/2021/07/18/still-working-remotely-your-2021-taxes-may-be-more-complicated-.html. Accessed Dec. 23, 2021.
5 Ibid.
6 Emma Kerr. U.S. News & World Report. Oct. 26, 2021. “How Remote Work Could Affect Your 2021 Income Tax.” https://money.usnews.com/money/personal-finance/taxes/articles/how-remote-work-could-affect-your-income-tax. Accessed Dec. 23, 2021.
7 Emma Patch. Kiplinger. Dec. 20, 2021. “Strategies for Working Remotely.” https://www.msn.com/en-us/money/personalfinance/strategies-for-working-remotely/ar-AAS028V. Accessed Dec. 23, 2021.
We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.
The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.
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