Paying Taxes When You Work from Home

As technology adapts to allow more employees to telecommute, the traditional office is becoming more of a makeshift desk on the kitchen table than a cubicle across town. However, if your employer is in a state other than the one in which you live, you’ll have a little bit of a different tax situation than someone who actually commutes to another state for work.

Which State to File In

Your tax situation will decide whether you can file a single tax return, or if you need to file two different state tax returns. You may be required to file a resident return and a non-resident tax return.

  • Resident return: Filed in the state in which you live. All of your income is taxed by your home state, even if it is earned in another state.
  • Non-resident return: filed in the state in which you haven’t lived in during the past tax year, yet had earned income from sources within that state. Each state has a different tax code for non-residents regarding payment of income tax within the state.

Though each state is different in their non-resident tax laws, in many cases if you work remotely (meaning you don’t actually travel to the other state for employment) in a different state, you’ll only have to pay taxes to the state in which you live. In many cases, you only have to file a resident tax return for your home state.

That said, if you receive a Form W-2, Wage and Tax Statement (usually arrives in January) that lists a state that is different form the one in which you live, you’ll need to file a non-resident return for the state documented on the W-2. In these situations, you’ll have to file two different returns: One for the state you live in (resident) and one for the state your company is located in, which should be the state listed on the W-2 (non-resident).

Report it ALL

When you file your resident tax return, it’s important not to forget to include all of your earned income, regardless of which state it was earned in. The only exception to this is if you live in an income tax-free state.

One example, two scenarios:

Scenario 1: You live in New Jersey, but telecommute for a company located in New York. Your W-2 arrives promptly in the beginning of January and New York is not listed as a state withholding income tax. You don’t have to file a return for New York, and you won’t owe any money to the state. All of your earned income will be reported when you file your resident New Jersey state tax return.

Scenario 2: Same home/work situation as above, however when you receive your W-2, both New York and New Jersey are listed. Now you need to file a non-resident (since you don’t live there) tax return for New York state. On the non-resident return, you only have to report the income information documented on the W-2 for that state. Your NJ return will still list all of your earned income.

If you pay taxes on the same income twice, you’re able to take a credit in your resident state for taxes paid to your non-resident state. This deduction should be dollar-for-dollar.

Income tax-free states

The following states do not tax income and therefore do not require residents to file a state tax return:

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming.

This means if you work from home and you live in Nevada, you won’t have to file a resident tax return. In many cases, you won’t have to file a state tax return at all, unless another state’s withholdings are listed on your Form W-2, as indicated above.