State Tax Implications of Remote Working
During the coronavirus pandemic, many companies required their employees to work from home. This, in some cases, allowed employees to avoid long commutes, and to potentially work from anywhere in the country. While remote working may be convenient for both the employee and the employer, it may raise some state income tax complications.
What Is a State Income Tax?
A state income tax is a tax levied on income earned within each state and the District of Columbia. Unlike the federal income tax, state income tax varies from state to state.
I Am Working Remotely in Another State. Should I Pay State Income Taxes in That State?
It depends on the laws of the state. Every state has its own rules on who is required to pay income taxes. A key question to ask is whether your state taxes resident taxpayers.
Tax on Earned Income: "Resident" Taxpayers
Forty states and the District of Columbia tax “resident" taxpayers on all of their income irrespective of where it is earned. To establish residence, most states look at either:
- How long you stayed (more than half a year) or
- If you have your domicile in that state
What this means is you may end up paying taxes for a state even though you have lived most of the year in another state.
You may also be required to pay state income taxes to a state when you have no intention of permanently relocating to that state.
For instance, let's say a company located in California allowed its employees to work remotely. So, Mr. X, an employee, decided to work in his family home in Minnesota for 8 months. Mr. X will need to pay state income taxes to the State of California since he is still domiciled in California. He may also need to file a tax return in Minnesota since he has lived there for more than half of the year.
To avoid these double taxation issues, states came up with different arrangements. These include:
1. Reciprocity Agreements
Some states have reciprocity agreements or offer tax credits to keep you from being taxed two times. New Jersey and Pennsylvania, for instance, agreed “New Jersey residents employed in Pennsylvania are not subject to Pennsylvania income tax."
Other states like Connecticut offer credit to residents who pay income tax in another state.
2. Convenience Rule
States that follow the convenience rule tax employees that telework in the state where the employer is located. States that follow this rule are Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania.
Since states apply different rules when it comes to telecommuting employees, make sure to research the laws of both your home state and the state you plan to work in so there are no surprises when you file your taxes.
Are There Tax Implications for My Employer if I Work in Another State?
There are instances where your employer may be required to pay taxes in the state where you are telecommuting. If the state can show that the company has a sufficient presence in that state, otherwise known as nexus, it can tax a company. Here, the nexus may be a single employee working from home in that state.
Therefore, it is important to inform your employer if you intend to work from another state to ensure both you and your employer are compliant with the laws.
Make Sure To Comply With Your State's Rules
If you are working remotely, you may be subject to some complicated tax rules. Here are some tips to ensure you are compliant with your tax obligations when you file your return:
- Keep records of how much time you spent in a state
- Research about the income tax laws of your home and work state
- Inform your employer of your plans of working in another state
- Speak to a tax professional to determine the implications of working in a particular state
Litigation Around Telecommuting and Taxes
There have been a few instances where states tried to stop other states from taxing residents who are working remotely. One notable example is the legal battle pending in the Supreme Court.
This is a case where New Hampshire sued the neighboring state of Massachusetts to stop it from taxing the income of New Hampshire residents. New Jersey, Connecticut, Hawaii, and Iowa have also submitted briefs in support of New Hampshire.
The case involves residents who used to commute to their jobs in Massachusetts but are now working from home due to the COVID pandemic.
Speak To a Tax Attorney About Working Remotely
Working remotely in another state may be very convenient for a number of reasons. But it may come with very complicated tax rules. In such cases, it may be in your best interest to speak to an attorney to ensure you are compliant with the tax laws.
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