Many employers in Pennsylvania have been forced to close their offices and develop a remote workforce. These long-term, forced work-from-home conditions have resulted in a number of tax effects. Employers should develop clear policies and procedures associated with remote work and fully educate their employees and contractors. In the absence of such employer guidance, employees should make themselves aware of the tax implications of working from home. A good accountant from our membership roster can help.
Local earned income tax
Employers are required to withhold the greater of the local earned income tax of the location in which the employee lives vs. where the employee works. Employers in high-tax cities, such as Philadelphia, Harrisburg, and Scranton, usually just withheld taxes at the rate of their office, since most areas around the cities had lower earned income tax rates. This made tax withholding fairly simple for the employer.
But with many employees being required to work remotely, employers should be withholding at the rates of the employees’ areas of residence. This means withholding at a variety of rates, which is more complicated and could lead to unintentional mistakes or delays in adjustments.
Remote workers should make the effort to confirm that their local tax being withheld is at the appropriate rate, and if you find the change was not made retroactive to when you started working from home, you may be eligible for a refund.
Living in one state, working in another
Different states have different laws governing the taxes an employee must pay when he or she lives in one state but works in another. Many states require employees to file in the state in which they work, even if they live in another state. Therefore, if you live and work in two different states, you may see a significant tax impact.
However, some states have “reciprocal agreements” that alleviate the tax burden, not requiring those who live in one state but work in another to file in both states. Fortunately, Pennsylvania has reciprocal agreements with every bordering state except New York and Delaware. Thus, if you live in Ohio, West Virginia, Maryland, or New Jersey but you work in PA, you only have to file in your own state of residence. The reverse is also true; if you live in PA but work in one of these states you only have to file in PA.
Since this was the case before forced remote work started due to COVID, you are not likely to notice a tax difference due to working from home. However, if you worked or resided in NY or DE but resided or worked in PA, you may see a tax change.
Deducting a home office
The Tax Cuts and Jobs Act suspended the home office deduction for W-2 employees for years 2018 – 2025. Currently, if you are self-employed, an independent contractor, or working in the gig economy, you may deduct expenses for your home office, under the stipulation that you conduct business at your home on a regular basis and that it is your principal place of business.
Homeowners may deduct a percentage of home expenses in proportion to the square footage of the home office in ratio to the total square footage of the house (office square footage divided by total home square footage). Another option is to use the room-count method if all the rooms in your home are roughly the same size. Therefore, if you have 10 rooms and you use one room for your office, the business percentage of your household expenses is 10%.
Renters may also take advantage of the home office deduction; however, they do need to have a section of their rental home or apartment set aside exclusively for office use. It does not have to be an entire room but it needs to be a dedicated portion of a room.
Typical expenses that can be deducted at the business percentage include mortgage/rent, taxes, utilities, repairs to items that affect the whole house (such as heating), trash removal, etc. Thus, if your business portion is 10%, you may deduct 10% of these expenses for home office use.
Claiming depreciation of a home office and then selling your home
If you build a home office, you may depreciate the cost of building supplies and renovation. If you later sell your home, you may have a taxable gain or loss. Any gain or loss on the sale of the home may be both personal and business. While the personal portion of a gain may be partly or completely excluded from income, the business portion is taxable up to the amount of the depreciation claimed in the past.