Tax Implications of Working From Home

September, 20 2020

Our 2021 tax returns weren’t something we were thinking about back in March 2020. We were all focused on getting our employees set up for work at home. Today, we’re into about the sixth month of working remotely. If you haven’t considered what your 2021 tax filings will look like, now is the time to review.

Both employers and employees will be in for a few surprises, and I’m afraid they are not the good kind. Let’s look at what everyone on your team needs to keep in mind.

No, employees cannot write off work-from-home expenses

Employees who have been working from home and thought they could deduct their home office expenses are mistaken, unfortunately. Your employees—that is, anyone who receives a W2—may have assumed they could write off items they bought to make work from home easier like a bigger desk, a better chair, or new computer equipment.

However, the Tax Cuts and Jobs Act of 2017, which went into effect in 2018, eliminated the federal write-offs previously allowed for unreimbursed business expenses and home offices, along with most other miscellaneous itemized deductions. Remember, the thinking was different in our pre-COVID-19 days!

This doesn’t impact independent contractors or entrepreneurs working from home. This impacts employees who now work from home.

Remote employees and tax presence

This issue is highly state-dependent but worth reviewing. Remote work raises the question of whether an individual or a business has established a tax presence in a different state.

A company’s presence (or tax nexus) determines whether a state can levy taxes on the business and its workers. If your employees are working from home in a state that’s different than the one your business is located in, this could technically give your company a presence there. Your employees may be subject to tax withholdings in that state, and your company may need to comply with that state’s payroll tax registration requirements and corporate income tax obligations.

It gets even more complicated if an employee usually lives in one state but has temporarily fled to—and is now working from—a different state. This can happen when families have temporarily moved to be with relatives because of COVID-19.

Next steps

To prepare for the potential tax implications of remote work, make sure that:

Your employees:

  • Track the time spent working at a temporary remote location
  • Monitor their tax withholdings on each paystub
  • Communicate to you, the employer, if they are planning to continue work from home after it is safe to return to the office

You, the employer:

  • Know what state your employees are working from
  • Monitor their time spent working in that location
  • Stay up-to-date on guidance issued by states where they are working
  • Contact your tax professional to understand and work with all of the new rules. This is especially true if you received a PPP Loan.

Brigade Bookkeeping can help you strategize for these impacts. Small businesses are our specialty, and we look forward to assisting you!