What You Need to Know About Doing Your Taxes When You Work From Home
Confused about your tax liability as a remote worker? This guide will help you sort your work from home taxes like a pro and make the task less daunting.Image
If you worked remotely for some, if not all of the previous tax year, you may be confused or daunted by the task of calculating your work from home taxes.
After all, figuring out how to file your annual tax return is challenging enough. But remote workers have a few extra hoops to jump through to determine their tax liabilities. And there are even more nuances to consider thanks to the COVID-19 pandemic.
So if you’re feeling overwhelmed right now, don’t sweat it. You’re in the right place.
Today’s guide will show you exactly how to work through this situation, whether it’s your first year as a remote employee or your first time determining your tax liabilities as a self-employed independent contractor.
6 Things You Need to Know About Doing Your Taxes When You Work From Home
Whether you’re a full-time remote employee or you transitioned due to COVID-19, you should have a basic understanding of what your tax liabilities may look like. You don’t want to make Uncle Sam upset, or you could get audited later down the road.
So consider these six crucial points before filing your taxes:
1. Understand the Type of Employee You Are
First order of business: Are you considered an employee, or are you a self-employed 1099 independent contractor?
While these may seem similar in terms of workload, there’s a big difference when it comes time for taxes.
If you’re a remote employee, your employer should have asked you to fill out W2 paperwork when you first started. This form determines how much your employer will automatically deduct from your paychecks in taxes.
If you’re an independent remote contractor, you’re considered self-employed and a 1099. This means you must take out taxes on your own and pay them quarterly. You must also file an annual return. We’ll touch more on this point later.
So your first job when filing your remote work taxes is to determine whether you are an employee or an independent contractor. Figure this out and then:
2. Consider Where You Worked During Your Last Taxable Year
Where you worked also plays a significant role in your tax situation, especially when you work remotely.
Your income is taxed where you live, which is known as your domicile or home. However, you could also be taxed if you worked remotely somewhere else.
So if you decided to use the COVID-19 pandemic as a chance to become a digital nomad traveling and working around the country, you could be responsible for paying taxes in those states too.
Whether this applies to you depends on two factors:
- The laws in the states that you worked
- How long you worked in those states
For example, Vermont has legislation that says you must pay taxes in their state if you worked there for two weeks or more -- even if it was only remotely.
On top of that, some states require that you pay state income taxes and may ask you to do this even as a non-resident.
So you could potentially need to file two returns: one for your home state and one for where you worked (or more depending on how many places you clocked in virtually).
Does that mean I could be taxed twice?
The answer is yes. You’ll likely be taxed in both states. However, your home state may offer you a tax credit once you let them know that you worked in other states as well.
To determine all of this, you need to think about where you worked this past year and for how long. Then, review the tax laws for each state, along with your home state’s laws, to figure out what you might be liable for.
3. Watch Out for the Convenience Rule
Another potential tax issue is whether you worked remotely out of convenience.
For example, if you choose to work remotely to avoid a lengthy commute or avoid catching COVID-19, but your employer still kept a physical office open during this time, you may be liable under the convenience rule to pay income tax in your employer’s state on top of your home state (if they’re different).
So, if you should have worked in New York when it opened back up, but you continued working remotely in your home state of Connecticut, you’ll still be responsible for paying taxes in both states, thanks to the convenience rule.
There is one loophole to this rule because of COVID: If your employer shut down the physical office due to state guidelines, and you had no choice but to work remotely, you won’t be responsible for paying taxes in both states.
4. If You’re Filing as a 1099, You Must Make Quarterly Tax Payments
Now, if you’re an independent contractor or 1099, you must make estimated quarterly tax payments to the IRS, as mentioned earlier, on top of filing your annual return.
Estimated quarterly tax payments are when you take out a set amount of taxes based on your income for each quarter and send this payment over to the IRS.
If you were a remote employee, your employer would automatically deduct these taxes from your paycheck. On the other hand, independent contractors must do this themselves.
This means you’ll need to fill out a 1040 ES form, which you can obtain from the IRS. Then you’ll need to send over your estimated quarterly tax payments by their specified dates.
The IRS sets the quarterly tax payment schedule as follows:
- First quarterly payment: Due on April 15 and covers your income from January 1 to March 31.
- Second quarterly payment: Due by June 15 and covers the income you earned from April 1 to May 31.
- Third quarterly payment: Due by September 15 and covers your income from June 1 to August 31.
- Fourth quarterly payment: Due by January 18 of the following year and covers the income you earned from September 1 to December 31 of the previous taxable year.
Save this visual of 2021’s estimated tax payment due dates for your records:
As an independent contractor, it’s up to you to send your quarterly payments in on time. The IRS will not send you a reminder, and you must reach the deadline on your own. If you fail to do this, you may get hit with a hefty fine during your annual tax return.
Again, if you’re a remote employee, your employer will automatically send these tax payments for you because they will be deducted right from your paycheck each pay period. Easy peasy!
5. Understand What You Can and Cannot Deduct
You may be able to deduct specific office expenses from your tax liability, depending on whether you’re a remote employee or a 1099 independent contractor.
Deductions do not turn into automatic refunds where you’ll be reimbursed for the expenses you incurred while working remotely. Instead, deductions will lower your taxable amount and thus lower what you owe Uncle Sam.
Independent contractors can deduct home office expenses, such as computer equipment, printer paper, internet service, etc. However, remote employees cannot do this. That’s another reason it’s so important to understand your official employment status.
You can learn more about home office deductions and deducting business expenses by visiting those IRS links when you’re done here.
6. Always Keep Good Records
It’s crucial to keep clear, organized records of where you worked, how much you earned each month, and your business expenses throughout the years.
These not only help you handle your taxes appropriately but may also prove beneficial if your math is wrong. You may have to go back to correct or adjust your initial payment, which may mean paying more in taxes.
It’s also a good idea to keep these records handy for at least seven years, which is the amount of time the IRS could audit your returns. If they notice any tax issues or discrepancies, these records could help you clear everything up without a fine or penalty.
Final Thoughts on Paying Your Work From Home Taxes
We hope this guide helped you get a handle on what your tax liabilities could look like as a remote worker. You should now know exactly what you're up against and have the confidence to proceed like a pro.
If you still feel confused or overwhelmed after reading this, you may want to reach out to a professional accountant who specializes in remote workers, so they can better guide you.
Being a remote worker doesn’t mean you don’t have to worry about your taxes. But it does mean you’ll need to get it sorted before it’s too late. And if that sounds like too much work, it may be best to reach out to a professional or use specific tax software to avoid any issues with the IRS.
In the end, determining if you’re a 1099 independent contractor versus a remote employee will make a big difference in your tax situation, which is why this should be your first step. Then just work through the rest of the tips in this guide to get your taxes squared away and keep Uncle Sam happy.
← Back to Blog