According to a survey by Upwork, one in every four Americans worked from home in 2021. In 2025, you can expect to see around 36.2 million Americans working remotely as well, which is 87% above the pre-pandemic average. Are you going to be (or are you currently) one of them?
While there are many benefits of and rewards to be gained from working at home, the experience isn't as run-of-the-mill as, say, your usual office job. Depending on which career path you choose, it can make things, like taxes, a little more complicated. Read on to learn how.
Employment Determination
One of the first things you will notice when looking for remote employment or a "side hustle" is that there are many different types of work. You will need to sit down and figure out what is important to you.
If you want benefits, freelancing as a 1099 contractor may not be the best option for you; however, if you want the freedom to set your own hours and be your own boss, you may enjoy freelancing a lot more.
Defining Telecommuting and Remote Work
Telecommuting and remote work are fairly synonymous, but with a slight difference: telecommuting implies that the worker may be required to show up to a physical work location now and then (or not at all) at the discretion of the employer, whereas "remote work" means the individual is working outside the physical area of the business.
Independent Contractor
Regarding employment, an independent contractor, also known as a 1099 worker, is classified as somebody who is providing a service to a business and receiving compensation rather than somebody who is legally contracted to work in a predetermined role with set hours for that business.
Independent contractors usually work freelance jobs, odd gigs, or side hustles, and usually enjoy the following benefits:
- Narrowed niche: As an independent contractor, you can offer something specialized and charge clients based on your experience. There is more room and flexibility for you to use to set your prices.
- Freedom: Instead of being stuck behind your home desk working a 9-to-5 job, you have more control over your schedule and when you can provide services.
On the flip side, working as an independent contractor also entails:
- Instability: Many people struggle with finding full-time work and running a business when they are 1099 workers, dealing with inconsistent flows of work and periods where there may be no money coming in at all.
- No benefits: When you are a W-2 employee, your employer may offer you an attractive benefits package that supplements your income and provides access to group discounts through the organization. This can come in the form of healthcare benefits and retirement account contributions, among other things. A 1099 worker will be entirely responsible for providing themselves with these benefits, which may come at a higher cost than a W-2 employee.
- Must save money for taxes: Employers will usually withhold your taxes from your paychecks for you so you don't have to worry about setting aside funds to pay Uncle Sam. As a 1099 worker, no taxes will be automatically withheld from your pay, so you should set aside money to pay taxes yearly or quarterly.
Employee
An employee is also known as a W-2 worker in the eyes of the IRS. Usually, when you think of people who work from home, you may think of independent contractors; however, there are now employers who are hiring at-home W-2 workers. You can snag a job through Indeed.com or Glassdoor under remote work. You will still get all of the same benefits and pay as a traditional worker, except you'll work from home.
- Benefits: Employers will often offer a wide variety of benefits for an employee to choose from, which can help cover medical expenses and pay into retirement.
- Stability: An advantage of becoming a work-from-home W-2 employee is that there is always work available to you because you're legally contracted to work for that business. You won’t have to search for jobs or spend time negotiating; it's all built into your employment contract or job description.
- Taxes withheld: Another significant stress relief is that employers withhold taxes from employee paychecks, leaving their W-2 employees with net income left to spend and without the hassle of managing your taxes.
Some of the drawbacks of becoming a W-2 employee include:
- Less freedom: One of the biggest drawbacks of being a W-2 employee is a significant reduction in freedom. You may have less flexibility to set your working hours or choose your clients. You will have to work to acquire vacation time and paid time off as well as adhere to company policy and rules.
- Time-consuming: It is still traditional for employees in most industries to commit to a 9-to-5 work schedule, even from home (although this is evolving as remote work challenges traditional work hours). You will need to set aside eight to nine hours a day to be clocked in and working for your company.
- Bosses: You will have to listen to your boss and work for someone else. This may not sound like a big deal, but for many people, this is undesirable.
Choose your employment determination wisely: it's easier to transition from an independent contractor to an employee than it is to transition from an employee to an independent contractor.
Determining State Income Taxation
As a 1099 worker, you're entirely responsible for setting aside money for and paying your taxes. Here is what you need to know as a freelancer paying taxes:
- You will need to pay state taxes. All states have their own taxes for freelancers, except Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
- You will need to file an annual state income tax return within the state you live in, not the state you “work in.” Residency is usually based on where you have registered as a voter, where you have a registered driver’s license, and/or where you own your home.
- Independent contractors can still get Social Security and Medicare benefits when they retire.
Convenience vs. Necessity
The Convenience of Employer Test is a tool that determines whether or not work-related or home office expenses incurred by workers are deductible. If these expenses pass the Convenience of Employer Test, they become tax-deductible for the employee; if they do not, the employee will not be able to claim a deduction for the business use of whatever that work-related or home office expense may be.
The goal of this test is to help make necessary business equipment not provided by the employer more affordable for employees to purchase.
Reciprocal Agreements
Reciprocal agreements are agreements between two states that allow an employee to request tax exemption from the other state. This can make filing taxes easier and allow you to avoid the hassles of paying taxes in two states.
Qualifying for Tax Deductions
When you have to do your taxes at the end of the year, you can choose to itemize deductions if you choose to not take the standard deduction. More deductions may present themselves to you based on your fiscal situation, like if you own a home.
If you own a property for your own personal use and if you itemize deductions on your federal tax return, you can claim a deduction on your property taxes. If you're struggling to pay your property taxes, consider taking out a residential property tax loan. Some of the benefits of property tax loans include avoiding delinquency penalties and foreclosure on your home.
Here are some other common tax deductions for 1099 workers:
- Home office space: You can deduct a portion of your rent or mortgage for the room space;
- Home office supplies: This includes desks, chairs, and computer equipment;
- Wi-Fi and utilities: You can deduct a portion of your Wi-Fi expense;
- Travel costs: If you travel for work, you can write off your travel expenses;
- Marketing services: If you created business cards, flyers, or ran paid advertising, you can deduct those expenses.
- Paid professionals: Many freelancers need to hire lawyers for contracts or other professional purposes. This is also a deductible expense.
Keep track of all your business-related expenses, most especially as an independent contractor, so that you may better determine if you should itemize deductions or take the standard deduction on your tax return.
