How to fill out your tax return correctly if you work from home

Working from home (or anywhere else outside of the office) can have some benefits. The simplified tax situation is clearly not one of them, says CNBC.

If you've been working remotely in 2021, then make sure you understand your tax obligations this filing season. Depending on various factors, including your state of residence, how long you worked where you worked, and possibly where your company is located, you may need to file more than one state tax return.

It can be difficult. Different states have different approaches to filing taxes on money you earn there.

For example, some states allow non-residents to work within their borders for at least 30 days without withholding tax. Other state thresholds move faster, including 23 states that require you to pay taxes from the first day you work there. Still others have a tax threshold based on wages, and nine states have no income tax at all.

Keep in mind that your state of residence usually has the right to tax your income, regardless of where it was earned. The more important question is whether the other state has the right to do so.

Tax incentives don't always help

Most states offer a tax credit, which is calculated based on what you owe in the jurisdiction for a non-resident of the state where you worked and where you owe taxes. However, the loan may not completely eliminate the amount paid to the second state if its tax rate is higher than where you live.

“Sometimes tax breaks help, and sometimes they don't,” said April Walker, lead manager of tax practice and ethics at the American Institute of Certified Public Accountants.

Meanwhile, some states (16 of them, according to the institute) have mutual agreements with each other. Basically, if your state of residence has an agreement with the state where you work, you won't have to pay in both jurisdictions.

For example, if you live in Maryland but work in the District of Columbia, you only need to worry about withholding taxes for Maryland and filing your tax return there.

There are also several states (Connecticut, Delaware, Nebraska, New York, and Pennsylvania) that are introducing an “employer convenience” test for remote workers. If your company is located in one of these states, you will generally pay taxes there (whether or not you physically set foot in it) unless your employer requires your remote location.

Also, if you are an independent contractor for your company (not getting a W-2 but, say, a 1099-NEC), then you are considered self-employed and your income is taxable. This means that you are responsible for determining which states you owe taxes based on factors including where you live, where you were when you earned the money, and the amount you earned.

It is worth contacting a consultant

Regardless of your employment situation, it is worth consulting with a tax advisor if you think you may need to file in multiple states.

There is a possibility that at some point the taxation of remote workers may change, given the pandemic-induced growth in the mobile workforce in the country. In September, 45% of full-time employees worked partially or completely remotely, according to a Gallup poll.

A bipartisan bill in the Senate, the Remote and Mobile Worker Assistance Act of 2021, prohibits states from taxing or requiring withholding from non-resident employees who are in the state for less than 30 days. A similar measure is now before the House of Representatives.

Another Senate bill (with a corresponding bill in the House of Representatives) would limit the ability of states to enforce the employer convenience rule on nonresidents. However, all of these measures have been dormant in Congress since early 2021.

Also, while some states may have changed or relaxed their rules earlier during the pandemic, you shouldn't expect that to continue, Walker said. And it's possible that states will step up their enforcement efforts.