How Does Remote Work Affect Taxes?

The rise of remote work introduces complexities for employees and employers regarding tax obligations. Understanding how income is taxed across state lines is important for compliance and to avoid unexpected liabilities. The location where an individual physically performs work often dictates where their income is subject to taxation. This shift requires careful consideration of various tax rules.

Determining Remote Work Tax Residency

Determining tax residency for remote workers is complex, as it dictates where income is taxable. Tax domicile refers to an individual’s permanent home, typically the state where they pay personal income taxes. Physical presence also plays a role; many states assert tax jurisdiction if an individual is present for over 183 days during a tax year, potentially leading to residency in multiple states.

Remote employees can also create “employer nexus,” a sufficient connection between a business and a state that allows the state to tax the business. A single remote employee working from home can establish physical presence nexus for their employer, potentially triggering new income, franchise, and sales tax obligations for the company. Businesses should conduct a nexus analysis when hiring a remote employee in a new state to understand these potential tax obligations.

States use specific rules to determine tax jurisdiction over remote worker income. The “convenience of the employer rule” taxes nonresident employees who work remotely for an in-state employer if the work is for the employee’s convenience, not the employer’s necessity. In such cases, workdays are considered performed in the employer’s state, making the income subject to that state’s income tax. Conversely, if remote work is required for business, those days may be allocated outside the employer’s state. The “physical presence rule” dictates income is taxed where the individual physically performs the work. For example, a 100% remote employee typically files and pays taxes only to their state of residence, unless the employer’s state has a convenience of the employer rule.

State and Local Income Tax Obligations

The “convenience of the employer rule” impacts state income tax liability for remote workers. If an employer is based in a state with this rule, an employee working remotely for their own convenience may face a dual tax obligation, paying taxes in both their resident state and the employer’s state. Some states may not allow a full credit for taxes paid to the other state, potentially increasing overall tax liability. This determination hinges on whether remote work is for the employee’s convenience or an employer requirement.

Reciprocal agreements between states simplify tax filing for remote workers. Under these agreements, residents of one state who work in a reciprocal state pay income taxes only to their home state, avoiding a non-resident tax return in the work state. This prevents unnecessary withholding by the employer’s state and streamlines employee tax obligations. Employees typically provide their employer with an exemption form to prevent inappropriate withholding.

When reciprocal agreements are not in place, “credits for taxes paid to other states” prevent double taxation. If income is taxable in both the resident state and the work state, the resident state generally provides a credit for taxes paid to the other state. This ensures the same income is not taxed twice, though the credit may not fully offset the tax if the other state has a higher rate. This applies when filing both a resident and nonresident return.

Local income tax implications add another layer of complexity. Some cities or counties impose their own income taxes in addition to state taxes. If a remote employee lives or works in such a jurisdiction, they may be subject to these local taxes. Rules for local taxes vary, sometimes requiring employers to withhold and remit them based on the employee’s physical work location.

Federal Tax Considerations for Employees

For W-2 employees, the federal tax treatment of unreimbursed employee business expenses changed due to the Tax Cuts and Jobs Act (TCJA) of 2017. The TCJA suspended most miscellaneous itemized deductions for tax years 2018 through 2025, effectively eliminating the federal deduction for unreimbursed employee business expenses for W-2 employees. This means remote W-2 employees generally cannot deduct costs like home office expenses, internet, or utilities on their federal tax returns unless they are self-employed.

Employer-provided equipment or stipends for home office expenses are treated differently for federal income tax purposes. Equipment like computers or cell phones provided by an employer for business use is generally not taxable income. Cash stipends or allowances for home office supplies are typically taxable income. However, if the employer reimburses specific, ordinary, and necessary business expenses under an “accountable plan,” these reimbursements are generally non-taxable fringe benefits. To qualify, expenses must be properly documented and substantiated by the employee within a reasonable timeframe.

Remote work can influence an individual’s overall federal tax liability. Changes in income or location may affect the applicability of certain tax credits or deductions. Remote workers claim either the standard deduction or itemized deductions, whichever results in a lower tax liability.

Employer Tax Responsibilities

Employers with remote employees face distinct tax obligations, particularly concerning state registration. A remote employee in a state can establish “nexus” for the employer, the connection required for a state to impose taxes. Businesses may need to register with state tax authorities in each state where they have remote employees. Failure to register can lead to penalties and increased tax exposure.

State and local income tax withholding requirements for employers are based on where remote employees physically perform work. Employers are generally responsible for withholding income taxes for the state where the employee lives and works, unless a “convenience of the employer rule” applies. This requires employers to comply with the withholding rules of each state where their remote workforce resides. Employers must also register with appropriate state agencies and obtain necessary identification numbers to properly withhold and remit these taxes.

Employer-paid payroll taxes, such as State Unemployment Insurance (SUI) and Federal Unemployment Tax Act (FUTA) taxes, are also impacted by remote work. Employers are liable for SUI taxes, which fund state unemployment benefits, and these rates and taxable wage bases vary significantly by state. If an employer has remote employees in multiple states, they must register with each state’s unemployment agency and pay SUI taxes according to that state’s rules. Federal payroll taxes, like FICA (Social Security and Medicare) and FUTA, remain largely consistent regardless of employee location within the U.S. While federal obligations are consistent, the varying state unemployment wage bases and rates necessitate careful compliance for employers with a dispersed remote workforce.