Tax Law Issues Related to Working Remotely in a Different State
Due to the coronavirus pandemic, many people worked remotely for at least a portion of 2020. Because of this, 2020 taxes may look a little different for some taxpayers.
For example, Lydia has lived and worked in Chicago for many years. In June 2020, to escape the city and take advantage of a backyard, she decided to visit her parents in Arizona for an extended stay. She ended up staying until September 2020 and working remotely. Lydia should file state income tax returns in both Illinois and Arizona because, while her permanent worksite and place of residence are in Chicago, she worked from Arizona for long enough to trigger its income tax rules (more than 60 days).
Permanently or Temporarily Remote
First, an employee should consider whether they are a permanent or temporary remote worker. A permanent remote worker is a worker whose worksite is outside the geographic location of the business. A temporary remote worker has retained their worksite at their employer’s geographic location, even if they have been performing their work tasks at home due to the pandemic. This status will be determined by your employer. If it is expected that you will return to your employer’s worksite, you are probably a temporary remote worker. If your employer has extended your work-from-home status permanently, you are likely now a permanent remote worker. If you are unsure whether you are a temporary or permanent remote worker, ask your employer.
Residence and Domicile
Residence may be established by a statutory test, which is different in each state, but it is usually determined by the amount of time that a person has spent in that state. A state may also use a worker’s domicile to determine their residence for tax purposes. A domicile is a permanent home as indicated by evidence such as where the person keeps their personal belongings and pets, where they attend doctor’s appointments, where they vote, and where their children attend school.
Is a Domicile Different From a Residence?
The state where you permanently reside is called your “domicile,” but you can also be a resident of a state if you spend a certain amount of time there. Most people are domiciled and reside in only one state, but working remotely in another state may change things.
State Tax Obligations
A worker may have tax obligations in any state where they reside and possibly the state where their employer’s worksite is located.
A permanent remote worker will file their personal income taxes in their state of residence, whether they are a W-2 employee or a 1099-NEC independent contractor.
If your W-2 lists a state other than your state of residence, you will file a non-resident tax return to that state as well as a residential tax return to your home state. Your home state may credit any income taxes that you pay in the other state.
Most states require a personal income tax return after a worker spends a certain amount of time working in the state, regardless of where the worker is permanently domiciled. For example, Arizona requires a tax return after 60 days of working in the state. New York requires a return after just one day of working in the state.
Multiple States, Multiple Tax Returns
If you reside in one state and work in another state, and your employer’s worksite is in a third state, you may have to file as many as three tax returns.
If your home state does not require income taxes, you will only need to file a tax return to the state listed on your W-2. If the state listed on your W-2 is the same as your home state or is one of the other states with no income tax, you will not have to file a personal income tax return for any state.
States Without Income Tax
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming
State Tax Agreements and Exceptions
Thirteen states have instituted pandemic exceptions for taxpayers. If a taxpayer temporarily relocated to one of these states due to the pandemic, they will not be liable to that state for income tax.
States With Pandemic Exceptions
Alabama, Georgia, Illinois, Indiana, Massachusetts, Maryland, Minnesota, Mississippi, Nebraska, New Jersey, Pennsylvania, Rhode Island, South Carolina
Some states have reciprocity agreements. This means that the states in the agreement have made paying taxes to each state easier on the worker. Agreements are more common between commuter states, such as Illinois and Indiana or Virginia and Washington, D.C. Reciprocity agreements may include tax credits or even exempt a worker from having to file a non-resident tax return at all.
Some states follow the “convenience of the employer” rule, which requires a worker to pay income taxes where their employer’s office is located because the employee works remotely for convenience’s sake rather than necessity. These states are Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania. This means that under certain circumstances, a person might be taxed both where they work and where their employer’s office is located, resulting in double taxation without any tax credit.
For example, if Jonathan works from his home in New Hampshire but is employed by a company in Connecticut, he will pay Connecticut income taxes under the convenience of the employer rule, even though his home state of New Hampshire does not have income tax.
Remote Work by Necessity or Convenience?
Depending on a state’s definition of working remotely by necessity or convenience, the coronavirus pandemic and a state’s travel restrictions may affect which category applies to a worker. Taxpayers who are unsure about their status should consult with a tax preparer.
Massachusetts has altered its tax scheme specifically in response to the pandemic. Massachusetts workers performing services outside Massachusetts due solely to the state of emergency are treated as though they remained in Massachusetts for tax purposes. Massachusetts will also award a tax credit for workers who started working in the state of Massachusetts as a result of the state of emergency, although they continue to incur tax obligations in another state.