3 Tax Questions Your Employees Will Probably Ask This Year
1.29.2021 | While tax questions are common this time of year, this year’s questions will be anything but common.
To help you address employee questions that are unique to the 2020 tax year, we’ve compiled the following Q&A.
1) If I worked remotely from a different state, do I have to pay additional taxes?
With work-from-home directives from employers, many employees crossed state borders to work remotely. Working from another state may or may not lead to additional tax liability; it can be tricky. As an employer, you’ll need to do your due diligence to understand your liability too.
Fortunately, the following states have issued waivers or guidance regarding pandemic-related remote work. (Click the links for additional information.)
- The District of Columbia
- New Jersey
- North Dakota
- Rhode Island
- South Carolina
Other states have reciprocal agreements that were in place long before the pandemic. These agreements are between neighboring states, i.e. New Jersey and Pennsylvania, where out-of-state commuting is common and therefore, income tax situations are clearly defined.
Additionally, six states have a “convenience of the employer rule” wherein employees of companies based in these states pay state taxes on compensation earned in another state due to the employee working remotely for their own “convenience” versus the employer’s necessity. Per the Tax Foundation, these states are Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania.
Regardless, unless pandemic-specific guidance is issued, further research is recommended and may warrant consultation with a tax advisor.
2) Can I deduct my work-from-home expenses?
A desk and chair, high-speed internet service, and a new printer – these may be some of the things employees purchased for their temporary home offices. Starting in 2018, the Tax Cuts and Jobs Act deemed these expenses as non-deductible – except for self-employed individuals or independent contractors.
As an employer, if you provided, paid for, or reimbursed employees for necessary work-from-home items, you can deduct these expenses and they will not be considered taxable income for your employees.
3) Why is/was my stimulus check lower than I expected?
Two rounds of stimulus payments were approved in 2020 and a third one is in the works for early 2021.
Employees who received, or will receive, stimulus checks that are lower than expected are most likely to have undergone a corporate relocation. If they obtained additional taxable income to cover their moving-related expenses, the additional income may have pushed them over the qualifying threshold and therefore reduced the amount of the stimulus check.
The good news is that stimulus disbursements are considered advanced payments, which means some employees may receive a tax credit on future filings. As an example: If an employee’s compensation exceeded stimulus thresholds in 2019 but did not in 2020, a tax credit will be applied against tax liability on their 2020 return. The credit will be equal to the stimulus amount they would have received if they had qualified based on their 2019 filing.
The 1040 Federal tax return instructions contain a worksheet to help determine if additional dollars are owed to the filer. The amount would be reported as “Recovery Rebate Credit” on line 30 of the tax return.
To provide your employees with all of the must-know information for the 2020 tax year, download our free Mobility Tax Guide. This comprehensive guide is easy to navigate, addresses many topics, and includes pandemic-related tax guidance.