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Remote Work: What It Means for Your Income Tax?

Many employees have transitioned to working from home as the COVID-19 pandemic grew. With the coronavirus pandemic still gripping our nation, this trend might continue – and numerous employers coming up with strategies that allow employees to work from home permanently.

There won’t be any tax implications for you if you work in the same state that you live in and file your taxes. However, if you’re not working in the same state where you were previously going to work (that is, you get to your job by crossing state lines), there might be some tax consequences.

While there won’t be any impact on your federal income tax, income tax for state taxes depend on where your employer or remote office is based. This means you might have to shoulder more tax burdens.

Living or working in a state can lead to ‘tax nexus.’ But what does the term ‘nexus’ refer to? Well, it’s used in tax law to describe when a business has a tax presence in a specific state. Simply put, nexus is a connection between an entity that must pay/collect the tax and the taxing authority.

For all businesses, one key determinant for tax nexus is having a physical presence. If a business has employees located in a state, it may lead to tax nexus – even if they’re working remotely.

Many states have specifically indicated that a telecommuting employee whose home isn’t considered a place of business for the company, has no contact with in-state customers, and who is not engaged in sales would still lead to tax nexus in the state where the employee is present.

In simple words, the remote home of the employee could be perceived as an office location, but then the employer would be subject to tax nexus in that state. Likewise, the employee could be subject to state income tax in the state they’re remotely located.

While this was an issue before the coronavirus pandemic, it’ll now likely become a more important issue among states. While some states aren’t providing any exceptions, others are granting coronavirus-related exceptions for a specific time. However, there’s a chance there will be an increase in disputes over tax nexus soon because the states are currently hungry for tax revenue dollars due to the COVID-19 pandemic.

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