If you’re among the employed Americans who were allowed to work remotely during the pandemic last year, count your blessings. But if you worked from a state other than the one where your employer is based, you may have to pay up for that privilege come tax time.
Here’s why: You are now going to be subject to the income tax rules of two or more states (depending on how many states you worked from remotely last year).
At the very least you likely will have to file more than one state tax return for 2021, which will cost you more if you’re paying someone else to prepare your taxes.
And in some instances – primarily involving five states that have so-called convenience rules (more on those in a minute) – you may even be double-taxed on the same income.
That’s why the best advice is to consult an experienced tax professional well versed in state tax law to help assess your situation. “Talk to someone. Figure out what the rules are. Then chart out your game plan from there,” said Timothy Noonan, the tax residency practice leader at law firm Hodgson Russ LLP.
Each state makes its own tax rules
All but nine states impose income tax on earnings. And each one sets its own parameters for determining who must file a return and who owes income tax.
To say the states’ rules are “all over the map” is apt here.
There are rules governing taxation of people working remotely for in-state and out-of-state employers. There are rules that will trigger the income tax for non-residents after they work in-state for more than a minimum amount of time or earn a minimum amount of money doing so. And if you worked remotely from a state for more than 183 days last year, you may even be characterized as a resident for tax purposes.
Plainly put, “it is super confusing,” said Lorraine Cohen, partner at Deloitte Tax LLP.
A potential double taxation scenario
Most states assert the right to tax someone’s income on the basis of their physical presence generating that income within its borders, Cohen noted.
So if your employer is based in one of these states and you worked remotely last year from another state with a similar rule, chances are fair you won’t be double taxed on the same income.
But your chances for double taxation go up if your employer is based in one of the five states – Connecticut, Delaware, Nebraska, New York, and Pennsylvania – that have what’s called a “convenience rule.” That rule basically asserts that a state has the right to impose an income tax on wages you earned while working for an employer based in that state, even if you choose to perform your job remotely from another state. The only exception: If your employer directs you to work out of state for its convenience, say because they need you to work at another branch for a period.
“If your office is in a convenience rule state, you can owe taxes both there and in [the other] state on the same income,” said Jared Walzcak, vice president of state projects at the Tax Foundation.
One example of this: If you were employed by a New York-based organization but chose to work remotely from California last year, New York will tax your income on the basis of its convenience rule. And California would tax your income earned while you were telecommuting from the state.
The good news: Some states will yield to the state imposing a convenience rule.
Or sometimes, two neighboring states may strike a “reverse credit” agreement that will help a remote worker avoid double taxation, although it may still subject them to a higher tax rate than they would ordinarily pay.
Cohen and her Deloitte colleagues offered this example in a recent article for Tax Notes: “An Oregon resident who works remotely in California is only subject to tax in California on the California liability amount that exceeds the Oregon liability amount. In contrast, a California resident working temporarily in Oregon would not have any Oregon tax liability because the California tax rate on wages exceeds Oregon’s tax rate.”
Or neighboring states might strike a “reciprocal agreement” – such as one that exists between New Jersey and Pennsylvania – that will clarify a resident of one state working in the other will only owe taxes to their resident state under certain conditions.
But you should assume nothing. Instead, get the facts specific to your case before plowing ahead with your 2021 tax returns.