The widespread shift to remote work has introduced a profound transformation in how professionals operate and where they earn their income. What began as a temporary necessity during the early months of the pandemic has, for many, evolved into a permanent change in lifestyle and employment structure. Employees now often work from their home offices in entirely different states than where their employers are headquartered. While this flexibility offers a host of benefits—ranging from improved work-life balance to broader hiring options for companies—it also brings with it a series of tax-related complications that few anticipated. For both individuals and businesses, the rules have not necessarily kept pace with the realities of modern work. These changes—and the persistent gray areas—highlight the need for nuanced guidance, something Edward Andrew Karpus has helped his clients navigate as remote work evolved from trend to norm.
The Concept of State Tax Nexus and Its Expanding Reach
One of the most significant tax issues emerging from remote work is the matter of “nexus.” In tax terms, nexus refers to the connection a business has with a state that may subject it to that state’s tax laws. Traditionally, nexus was based on physical presence—offices, employees, or inventory. However, with employees now working remotely from homes across the country, companies can unintentionally create nexus in states they never anticipated doing business in.
For example, if a company based in Georgia employs someone working from their home in Vermont, Vermont may consider that employee’s activity sufficient to establish nexus, subjecting the business to income tax, sales tax collection, and employment tax requirements in that state. This creates an administrative and compliance burden that many businesses were not prepared for, especially small and mid-sized firms that lack large in-house tax departments.
Complicating matters further, states have not adopted uniform guidelines for what constitutes sufficient nexus in remote work scenarios. Some have issued temporary relief provisions, recognizing the pandemic as an extenuating circumstance. Others have taken a stricter approach, using the opportunity to expand their tax base. As a result, businesses need to monitor changes in every state where their employees work to remain compliant—and avoid unexpected liabilities.
Employee Residency and Income Tax Implications
On the employee side, the transition to remote work also raises critical questions about residency and income tax obligations. Generally, individuals pay income tax in the state where they reside. However, if an employee lives in one state and works for a company in another—especially one that previously required in-office attendance—they may find themselves subject to tax filings in multiple states.
Some states employ what’s known as the “convenience of the employer” rule. Under this doctrine, if an employee is working from a different state for their own convenience—not out of necessity—they may still be taxed as if they were working in the employer’s state. This rule, which currently exists in states like New York and Arkansas, can lead to double taxation, where the same income is taxed by both states, and only partially offset by credits.
Employees who moved during the pandemic—whether temporarily or permanently—may now face questions about domicile and statutory residency. A domicile is your permanent home, but statutory residency is determined by the number of days spent in a state and whether you maintain a “permanent place of abode.” The combination of these criteria means that someone who split their time between two states could inadvertently trigger residency in both, requiring dual filings and complex allocation of income.
The Home Office Deduction: Not What Most People Think
Among the most misunderstood elements of remote work tax planning is the home office deduction. While many remote employees assume they qualify, the rules are more restrictive than they appear. For most W-2 employees, the home office deduction is not available. The 2017 Tax Cuts and Jobs Act suspended miscellaneous itemized deductions, including unreimbursed employee expenses, for tax years 2018 through 2025.
This means that unless the worker is self-employed or an independent contractor, they cannot claim a deduction for the cost of maintaining a home office—even if they are required by their employer to work from home. For freelancers, gig workers, and business owners, the rules are more favorable. They can deduct a portion of their home expenses (mortgage interest or rent, utilities, insurance, etc.) based on the percentage of their home used exclusively and regularly for business.
However, the IRS requires strict adherence to the rules. The space must be used exclusively for work—meaning a kitchen table or spare bedroom that doubles as a guest room likely doesn’t qualify. Inaccurate or overly aggressive deductions can trigger audits or penalties. Understanding the distinction between eligible and ineligible expenses is crucial for staying compliant and minimizing tax exposure.
Employer Compliance and Payroll Tax Considerations
Employers must also adapt their payroll processes to account for employees scattered across multiple jurisdictions. Each state has its own requirements for income tax withholding, unemployment insurance contributions, and reporting standards. Failing to withhold and remit taxes correctly can lead to penalties and interest, not to mention damaged relationships with employees who may find themselves owing unexpected taxes at the end of the year.
To address this, businesses must first determine where each employee performs their work, confirm whether that location triggers employer obligations in that state, and then set up withholding accounts and unemployment insurance registrations accordingly. Some states require even a single employee to register, while others have thresholds based on payroll amounts or the number of employees.
Another wrinkle lies in reciprocal agreements. Some states have agreements that allow residents of one state to work in another without double taxation. In these cases, employers only withhold taxes for the employee’s home state. However, the existence and scope of these agreements vary, and employers must proactively determine whether they apply.
Remote Work and Employee Benefits: Tax Impacts on Fringe Programs
As remote work has redefined traditional employment models, companies have also begun modifying benefits to suit the virtual environment. These include stipends for home office setups, co-working memberships, internet service reimbursements, and wellness programs. While well-intentioned, these benefits may carry tax consequences.
In general, reimbursements for business-related expenses are not taxable if they meet the requirements of an “accountable plan” under IRS rules. This means the expense must have a business connection, the employee must substantiate the expense with receipts, and they must return any excess reimbursement. If these conditions are not met, the reimbursements become taxable income to the employee.
Similarly, perks like gym memberships, yoga classes, or food delivery credits that may have been offered in a physical office context could be taxable if extended remotely. Employers must evaluate how the tax treatment of these benefits changes in a virtual environment and adjust their documentation and reporting practices accordingly.
Looking Ahead: The Push for Uniformity
As remote work becomes a permanent fixture of the modern labor market, there is growing pressure on policymakers to standardize rules across jurisdictions. Businesses, accountants, and advocacy groups are calling for clearer guidance on nexus, uniform definitions of residency, and equitable treatment of remote workers. Proposals have been introduced at both state and federal levels to address some of these concerns, but progress has been slow.
In the meantime, individuals and employers must continue to navigate a fragmented and sometimes contradictory tax landscape. Success depends on careful planning, detailed recordkeeping, and access to reliable, up-to-date guidance. What hasn’t changed is the need for proactive tax planning—but what has changed is the complexity and scope of the questions clients need answered.
Conclusion: Remote Work as a Catalyst for Tax Evolution
The rise of remote work has undoubtedly reshaped the workplace—and with it, the tax implications for both workers and employers. From questions of nexus and dual-state residency to limitations on deductions and compliance hurdles, the tax system is playing catch-up with the realities of how and where people earn their income. While many rules remain unchanged, their application now touches new scenarios that were previously rare or irrelevant.
As remote work continues to evolve, so too will the tax codes that govern it. Until a more uniform framework emerges, the burden falls on individuals and businesses to stay informed, act cautiously, and seek expertise that reflects the new reality. The goal is not just to avoid errors, but to embrace opportunities for strategic planning in this fluid and expanding tax frontier.