In most cases, working from home is a win-win both for the employer and employee. Employees typically love it because it means no commute into the office, no dress code, a greater sense of empowerment and, in many cases, greater productivity. For many, this all leads to happier overall employees, and studies indicate that the greater the level of employee satisfaction, the better their work is.
Employers tend to love offering work from home opportunities because it keeps their overhead costs down, not just when it comes to office expenses, but employee attrition as well. In fact, according to a recent Gallup survey, roughly 45 percent of all Americans say that they work from home for at least part of the time.
Despite the many benefits of working from home, there’s one notable disadvantage that you may not be aware of. And this thing could cost you big time when it comes to your taxes. Specifically, working from home could greatly increase your tax bill. Here’s a look at how:
Say you work at home for an employer that’s not based in the state where you currently reside. That’s where your tax problems may start. In a best case scenario, you’re only paying state taxes to one state, but in other instances you could wind up paying taxes to both the state you reside in and the state your employer is based in.
The good news is that it’s not like this in all states, but if you work for a company that’s based out of Pennsylvania, Nebraska, New Jersey, New York or Delaware, your risk of being double taxed increases. That’s because these aforementioned handful of states decipher this based on a convenience versus necessity basis. So, for instance, say that it’s determined that you’re working from home out of convenience and not out of necessity. If that’s the case, you’ll likely be paying taxes to more than one state.
How do you prove that your work from home situation is a necessity? Here’s a look at the things that are considered:
- You have to prove you can’t do the work you’re responsible for at the employer’s main office.
- You have to prove that your work from home situation is a condition of the job.
- You have to prove that there’s a purpose behind your work from home situation (i.e., you cover a sales territory in the area).
Can’t prove any of the above? Some states take it easy on you and give you a tax credit that you’ve paid to any other one, essentially meaning you’ll only be paying taxes to one state. But even if you fall under this arrangement, you’ll still have to file a pair of state tax returns, which isn’t ideal. Keep in mind that every state is different when it comes to these credits, not to mention the tax reform that was recently instituted doesn’t allow you to deduct state taxes greater than $10,000.
Reciprocal Tax Agreements
If you live in Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan and Ohio – just to name a few – then your home state has what’s called a “reciprocal tax agreement” with other nearby states. A reciprocal tax agreement basically says that you’ll only pay income tax to one of the two states if you work from home in a state outside of the one your employer is based in.
Make sure you familiarize yourself with all of these states that have reciprocal tax agreements with other nearby states if you’re weighing a work from home employment option.
What Can You Do?
Ideally, you’re aware of the potential to be double taxed before you agree to any work from home position. If that’s the case, and your situation would qualify to be double taxed, you have a decision to make. Would the costs you’ll save from commuting, relocation and such be worth it to pay twice the state income tax? That may be a decision you’ll have to make.
In a nutshell, be sure you know where you stand if you were to work from home for an employer based elsewhere. In most cases, it should be no problem. But there are those situations that could really wind up hurting you.