December 28th, 2020
When COVID-19 struck last March, many employers were thrust into a work from home model for their employees. Some of those employee’s took advantage of this newfound geographic freedom as remote workers to temporarily relocate. In some cases, this meant the company they worked for and where they physically resided were no longer in the same state or even country. While some workers have returned to their offices, many have not. If you are working remotely in a situation like this, you may be wondering if you have to pay income tax in multiple jurisdictions or whether you will need to file income tax returns in both states.
States can potentially tax income based on either where you live or where you work. 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 are not taxed twice. In metro Washington, DC, for example 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 worksite location even if they reside in a different state.
Remote working in multiple locations
Here is an interesting example. A person lives in Florida. During the pandemic, a mandatory office closure allows them to work remotely from their vacation home at the beach in North Carolina. NC is not the state that they are domiciled (i.e., their home). Come tax time, they will need to file a nonresident income tax return on income earned in North Carolina (their remote work location, but not their domicile) in addition to their usual Florida tax return.
The potential problem lies here. With the flurry of pandemic changes, their employer may not even know that they are working remotely from NC and may not withhold tax from their pay (income earned). These people will likely have an unpleasant tax season surprise and find they owe money.
How this can happen
Sometimes the tax rate in the remote location is higher than the taxpayer’s home state. In other instances, the home state does not impose income tax but the state they are working from does. In either case, the tax credit in the worker’s home state is unlikely to 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. These states include Alabama, Georgia, Illinois, Indiana, Massachusetts, Maryland, Minnesota, Mississippi, Nebraska, New Jersey, Pennsylvania, Rhode Island, and South Carolina.
Keep in mind, these waivers are temporary and, in some cases, may only be in effect during mandated government shutdown. South Carolina’s waiver, for instance, expired on September 30th, 2020, but was later extended through December 31st, 2020.
Necessity or convenience
Another important factor to consider is whether a worker’s remote location is due to necessity or convenience. If there is 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. During a pandemic this only becomes more critical because of the fluid situation surrounding special accommodations, government programs and unusual circumstances. It’s wise to keep track of how many days were worked in each state and how much money was earned in case you need to push back against a state trying to get more than their fare share of your tax dollars.
Help is just a call away
Tax laws are complex even during the most usual of times. If you have been working remotely during the pandemic in a different location than your office, then it pays to consult with a tax professional to determine your potential tax liability and recommend a course of action that can mitigate the chances of you having an unpleasant and potentially financially devastating tax burden come Tax Day.