As stressful as this time has been for business owners, employees have also been battling their own stress, fear for the future, and concerns for their families. While the flexibility of remote work has been an excellent benefit, the reality is it can complicate tax matters for employees and businesses.
Over the course of three articles we examine three components of remote work and business tax obligations. First, we looked at the employee perspective related tax withholding obligations. Secondly, we examined the business entity related tax liability issues. Lastly, we will review the types of questions your employees may have. Many of these scenarios have a wide variety of answers and most can depend on the jurisdictions and taxing authorities that touch each one.
State Income Tax Obligations
As touched on in our first article of this series, tax withholding can be a complicated issue. Employees may not be aware that working from home in a state that is not the principal place of business for their employer could impact where they need to pay taxes. For example, if an employee would typically cross into Georgia to physically go to work, but now works from home in Tennessee or at a family member’s home in Pennsylvania (or any other state), they may have different income reporting requirements, and thus different tax withholding requirements.
Employees can prepare for the upcoming tax season now by confirming their employer has the following information:
- Notification if location changed
- Request to update withholdings, if applicable
- A list of the states in which work has been performed
- The number of days worked in each jurisdiction
- Confirmation for which state should currently receive income tax withholdings
- Confirmation if any emergency COVID related exceptions have been implemented
Home Office Expenses
Working from home can be convenient and not fighting traffic can be a relief. However, it can also be expensive to set up a functional office space in a home. Unfortunately, the Tax Cuts and Jobs Act eliminated unreimbursed employee business expense and the home office expense deductions for those that are employees. This means items such increased utility expenses – for example, if internet speed needed to be increased – or equipment or furniture that needed to be purchased to work effectively are not deductible by the employee.
Employers can assist employees by having an accountable plan to reimburse employees for ordinary and necessary business expenses. Under federal tax law, reimbursed expenses are not included in gross income of the employee if the reimbursement is for meals, travel or supplies that are ordinary and necessary. Employers can also provide equipment, such as computers, laptops, webcam, scanners, etc. for employees to use in their home offices. If a reimbursement is not required to be substantiated or returned if the full amount is not used, then the reimbursement is included in the employee’s gross income.
Another option to address additional expenses borne by employees working from home is to offer a stipend to cover new expenses related to working from home. Such stipends typically increase gross income subject to tax, both federal and state. Most states follow the federal treatment of reimbursements for business expenses, but it is always a good idea to check with your tax professional or state regulations.
States and local jurisdictions are grappling with how to maintain their day to day business activities, as well devise plans to address taxpayer questions. Additional guidance is needed for the wide variety of tax implications for businesses. The best course of action is to be informed, work with a tax professional, and be prepared for more changes on the horizon.
If you need help navigating tax issues for your business, we will be happy to assist. Please contact us.
Written by Erin Kidd, EA, AFC®, MBA:
Erin Kidd is the Tax Individual Practice Supervisor at Thompson Greenspon and has nearly a decade of tax experience specializing in individual taxation. Throughout her career, she has focused on simplifying complex tax issues and educating clients to maximize their tax benefits and plan for future events. Erin is responsible for the review of individual Federal and multi-state tax returns, managing the firm’s Military Spouse Remote Preparer Program, preparation of individual tax returns with international taxation and reporting requirements, and assisting with the resolution of client issues with Federal and State Taxing Authorities.
Erin holds a Bachelor’s and Master’s Degree in Business Administration from Morehead State University, is an Enrolled Agent, a federally licensed tax preparer who has unlimited rights to practice before the IRS, and an Accredited Financial Counselor ®. She has been recognized by the Garrison Commands of West Point, NY and Fort Leavenworth, KS for her contributions to the military community for her work with the installations’ Volunteer Income Tax Assistance Centers.
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