When COVID-19 struck, many employers quickly switched to a work-from-home model for their employees. Many of them began working in a state other than where their office was located. While some workers have returned to their offices, as the pandemic drags on, more offices continue to work remotely with no back-to-office dates in sight.
If you’re working remotely from a location in a different state (or country) from that of your office, then you may be wondering if you will have to pay income tax in multiple jurisdictions or whether you will need to file income tax returns in both states. Here’s what you should know:
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 jurisdiction depends on several factors, including nexus, domicile, and residency.
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. For example, in metro Washington, DC, payroll tax withholding is based on the 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 (and pay tax in) a different state.
Remote Working in Multiple Locations
Let’s say you live in Florida. During the pandemic, a mandatory office closure allows you to work remotely from your vacation home in North Carolina – a state that is not your domicile (i.e., your home). Next spring, you will need to file a nonresident income tax return on income earned in North Carolina (your remote work location, but not your domicile) in addition to your usual tax returns.
However, in all the pandemic confusion, your employer may not have known you were working remotely from NC and did not withhold tax from your pay (income earned). If that’s the case, then you may owe money.
If the tax rate in the remote location is higher than the taxpayer’s home state or the home state doesn’t impose an 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. Ideally, employers should establish a bona fide office at the teleworking locations of their remote employees and elect the proper state withholding of said employees, so they do not have to pay additional taxes.
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.
Tax Deductions Not Allowed for Employees Who Are Remote Workers
Prior to the Tax Cuts and Jobs Act of 2018, taxpayers who were employees were able to deduct job-related expenses such as a desk and monitor used for work purposes or other miscellaneous itemized deductions that exceeded 2 percent of their adjusted gross income. Under tax reform, however, this is suspended for tax years 2018-2025.
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 in each state and how much money was earned.
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.