The Tax Headaches of Working Remotely
“Each state has its own rules,” one tax expert says. So if you worked in a state other than your usual one in 2020, here are some tips on dealing with the tax season.
Last year, Ariele Doolittle, a tax lawyer, got a call from a client who lived and worked in New York but was considering working remotely from California temporarily after his offices were shuttered in the pandemic.
Not a good idea, Ms. Doolittle told him.
California, she said, would tax his income because he was physically working there. And New York would probably tax his earnings as well. Plus, when he filed his New York resident tax return, the state probably wouldn’t give him a credit for the taxes he paid to California.
He could be double taxed. “He ended up going to Florida,” she said, since that state doesn’t have a state income tax.
Such are the complex tax considerations for millions of people who have been telecommuting during the pandemic and working in a different state from their usual workplace.
Workers may have to file more than one state tax return, and in certain situations they could end up owing taxes in both states. The details depend on your home state and what state you worked in during 2020.
“Each state has its own rules,” said Eileen Sherr, director of tax policy and advocacy with the American Institute of Certified Public Accountants. And states may apply the rules differently, depending on what other state the worker was temporarily calling home during the pandemic.
Anyone who has been working remotely during the pandemic, whether their home is in a different state from their workplace or they have been living with family or friends or at a vacation home, “needs to evaluate their tax situation,” said Jared Walczak, vice president of state projects at the Tax Foundation.
State income tax rules are notoriously tricky. In general, wage income is taxed where you work, but your home state can tax all of your income from any source.
So someone who lives in one state and works in another may have to file two state tax returns: one in their home state and a “nonresident” return in the state where they work. Usually, that doesn’t result in paying twice. Typically, the employer withholds taxes from the worker’s paycheck for the work state, and the home state gives the employee a credit or deduction for the taxes paid to the “work” state. (That’s the case in 43 states and Washington, D.C., according to the C.P.A. institute.)
More than a dozen states, usually those that share a border and a hefty number of interstate commuters, try to simplify things by striking tax agreements with their neighbors. Virginia, for instance, has reciprocal tax deals with several states and the District of Columbia. People who live in Virginia and work in an office in Washington, D.C., file a tax return and pay taxes in their home state and don’t need to worry about filing in Washington, according to the Tax Foundation.
Fifteen states have said they won’t tax people who moved in temporarily during the pandemic, the C.P.A. institute says.
But a handful of states take a different, more aggressive approach. They use special rules to tax remote workers based on the location of their employer’s office — even if the employee doesn’t physically work at that location, according to the Tax Foundation.
Six states took this approach before Covid-19 upended office work: Arkansas, Connecticut, Delaware, Nebraska, New York and Pennsylvania. But now, that policy is facing fresh scrutiny since many people weren’t telecommuting by choice during the pandemic but were forced to work from home because their offices had closed.
The State of New York has so far said that it will continue the policy despite the pandemic. If you don’t live in New York, but your “primary office” is there, “your days telecommuting during the pandemic are considered worked in the state” unless your employer has a formal office at your remote work location, the state revenue department says on its website.
“I think it’s a pretty cheeky response,” Raymond Edwards, national technical tax director at wealth management firm Aspiriant, said of New York’s policy.
It means that if you usually worked in New York but are working remotely from your home in New Jersey during the pandemic, you’ll still owe New York state income taxes, said Alan Sobel, president of the New Jersey Society of Certified Public Accountants.