Working from Home: Tax Implications You Need to Know

The tax implications faced by an employer when their employees work from home are more complex than one might think. Here are a few things to keep in mind from both an employer and employee perspective.  

Tax Implications for Employers

When allowing employees to work from home and possibly in another state, it can have a significant impact on your tax filings.

Employers Withholding Tax from Wages

Employers are responsible for withholding taxes for employees working from home. Employees fill out the W-4 withholding forms before their hiring dates. Regardless of what state their employer is in, employees must have taxes withheld in line with their home state's tax laws. Be aware that certain states require employers to deduct taxes from the salaries of nonresident workers.

Filing Returns in the Numerous States

If you have workers in different states, you must consider all tax regulations of those states, including tax return filings and payments. Having an employee in another state often creates nexus, requiring the employer to file a tax return in that state.

Tax Deduction on Supplies Purchased for Remote Workers

Remote workers may need materials like computers, phones, and more to create an efficient work environment. As you purchase these items, remember that all purchases for remote workers are deductible if they are ordinary and necessary. For example, a business could deduct the cost of a new laptop for an employee but probably not a new espresso machine.

Nexus

Employers who have switched to a remote workforce must be aware of potential consequences for employees working from a different state. Working outside the employer's state might establish a physical nexus, which makes the employer liable for any taxes levied there. It may include county and city taxes on usage, sales, gross receipts, and income taxes.

Tax Implications for Employees

Working from home can provide many benefits for an employee. However, if you choose this route, consider the following items regarding your taxes.

Update Your Withholding as You Move

Working from home comes with its responsibilities, especially when you move from one state to another. For instance, if you move states in a year, you'll have to pay taxes in both states if you earn from them. So, as you work from home, remember to update your payroll department to avoid substantial tax bills.

Double Taxation

Are you remotely working in one state and living in another? If yes, then you must file returns for two different states. Luckily, Congress passed a law in 2015 that forbids double taxation, meaning you cannot be taxed twice on the same money. You may have to pay income tax in two states, but you won't have to pay tax in Iowa on your wages earned in Nebraska.

Tax Cuts and Job Act of 2017

From 2017 through 2025, the Tax Cuts and Jobs Act of 2017 abolished several tax deductions, including those for unreimbursed business expenditures. You cannot claim a tax deduction for your expenses when working from home that your company does not reimburse. Under prior tax legislation, employees could write off out-of-pocket costs related to their jobs that totaled more than 2% of their adjusted gross income. In 2026, the deduction will resume.

Changing Your IRS Address When You Move

When you submit your federal tax return for the first time after moving, the IRS will immediately update its records with your new address. However, you might wish to proactively inform them of your address change by filing an IRS address change form if you move in between tax filing periods. Doing this may make you confident that you get any crucial documents the organization sends you.

In Summary

While working from home comes with unique benefits and challenges, it's best to know the related tax implications to stay in compliance with the IRS and avoid notices and penalties. Contact us if you have questions or learn more about our accounting services.

Contributor: Mandy Schoen, Accounting Intern