How telecommuting can expose employers to unexpected taxes

If you allow employees to telecommute, be sure to consider the potential tax implications. Hiring someone in another state, for example, might create sufficient nexus to expose your company to that state’s income, sales and use, franchise, withholding, or unemployment taxes. And the employee might be subject to double taxation if both states attempt to tax his or her income.  

The rules vary by state and also by type of tax — and become even more complicated for international telecommuters. So it’s a good idea to review the rules before you approve a cross-border telecommuting arrangement.

The new 0.9% Medicare tax: Watch out for withholding issues

Under the health care act, starting in 2013, taxpayers with earned income over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) must pay an additional 0.9% Medicare tax on the excess earnings. Employers are required to withhold the tax beginning in the pay period in which wages exceed $200,000 for the calendar year — without regard to the employee’s filing status or income from other sources. So, it’s possible your employer:

Will withhold the tax even though you aren’t liable for it. You can’t ask your employer to stop withholding the tax, but you can claim a credit on your income tax return.

Won’t withheld the tax even though you are liable for it. You may use Form W-4 to request additional income tax withholding to cover your liability and avoid interest and penalties.

If you have questions about how withholding issues related to the new 0.9% Medicare tax might affect you, please contact us.

Tax consequences to consider before putting your home on the market

When you sell your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain if you meet certain tests. Gain that qualifies for exclusion also is excluded from the new 3.8% Medicare contribution tax.

Losses on the sale of your home aren’t deductible. But if part of it is rented or used exclusively for your business, the loss attributable to that portion is deductible, subject to various limitations.

Because a second home is ineligible for the gain exclusion, consider converting it to rental use before selling. It can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss, but only to the extent attributable to a decline in value after the conversion.
 
If you’re thinking about putting your home on the market, please contact us to learn more about the potential tax consequences of a sale.