While some workers have returned to their offices, many have not. If you’re working remotely from a location in a different state (or country) from your office, you may be wondering if you will have to pay income tax in both jurisdictions.
The short answer is that it depends on which states you live and work in.
Generally, states can tax income whether you live there or work there. Whether a taxpayer must include taxable income while living or working in a particular state depends on several factors including nexus, domicile, and residency.
In metro Washington, D.C. for example, payroll tax withholding is based on state of residency allowing people to work in another state without causing a tax headache. Other states such as Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania tax workers based on job location even if they reside in a different state.
Many states – especially those with large metro areas where much of the workforce resides in surrounding states – have agreements in place that allow credits for tax due in another state so that you aren’t taxed twice. Normally, this isn’t an issue, but let’s say during the pandemic a mandatory office closure allowed you to work remotely from your vacation home. If the tax rate in the remote location is higher than the taxpayer’s home state or the home state doesn’t impose income tax but the state they are working from does, the tax credit in the worker’s home state may not be enough to offset all – or any – tax owed.
During the pandemic, 13 states have agreed not to tax workers who temporarily moved there because of the pandemic including Alabama, Georgia, Illinois, Indiana, Massachusetts, Maryland, Minnesota, Mississippi, Nebraska, New Jersey, Pennsylvania, Rhode Island and South Carolina. Keep in mind, however, that these waivers are temporary and in some cases may only in effect during a mandated government shutdown.
Necessity or Convenience
Another important factor to consider is whether a worker’s remote work location is due to necessity or convenience. If there is a mandatory government shutdown, then it is a necessity. If the option to go back to the office exists, but the worker chooses not to because of health concerns, then the state could view it as convenience.
Keeping Good Records
Keeping good records is always important when it comes to your taxes, but even more so when there are so many unknowns. As such, it’s a good idea to keep track of how many days were worked and how much money was earned in each state.
Help is Just a Phone Call Away
Tax laws are complex even during the best of times. If you’ve been working remotely during the pandemic in a different location than your office, then it pays to consult with a tax and accounting professional to figure out your tax liability and recommend a course of action to lower your tax bill such as changing your withholding.
Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.