Remote Work & Income Tax Laws
While remote work is not necessarily new, the percentage of people who work remotely instead of commuting to an office every day has risen in the past few years. There are many advantages to working remotely, and the ability to work remotely is often an enticing benefit for job seekers. However, filing income taxes could look different for remote workers.
Residence for Tax Purposes
Income tax obligations generally arise wherever a remote worker resides. Residence may be established by a statutory test, which often considers the amount of time that a person has spent in that state, although the exact test varies. 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 owns a home, where they have bank accounts, where they attend doctor’s appointments, where they vote, and where their children attend school. Most people are domiciled and reside in only one state, but it is possible to reside in more than one state for tax purposes. A remote worker will generally file a tax return in each state where they established a residence during the tax year.
State Income Tax Obligations for Remote Workers
Workers typically pay income tax in any state where they reside, but they might also have income tax obligations in the state where their employer’s office is located. In some cases, if a worker is obligated to pay income tax in two states, they will be given a credit by one state for taxes paid in another.
Remote workers will file their personal income taxes in their state(s) of residence. When a worker’s W-2 lists a state other than their state(s) of residence, they will generally file a non-resident tax return to that state as well as a residential tax return to their home state(s).
Remote workers may pay non-resident income taxes where their employer’s office is located under the “convenience of the employer” rule, which requires a worker to pay income taxes where their employer’s office is located if they work remotely in another state for convenience’s sake rather than necessity. The states that follow this rule as of 2023 are Delaware, Nebraska, New York, and Pennsylvania. Connecticut, New Jersey, and Oregon follow the rule in a more limited manner. There is an exception if the work is performed remotely by necessity, but it can be difficult to qualify. For example, New York did not consider working from home due to the COVID-19 pandemic to be an exception to the convenience of the employer rule.
State Tax Reciprocity Agreements
Many states have reciprocity agreements with other states for income tax purposes. This means that if a source state (the state from which income is derived) and the state where the remote worker lives have a reciprocity agreement, the remote worker will only file state income taxes for their home state. Reciprocity agreements are more common between neighboring states, such as Ohio and Kentucky or Maryland and Virginia.
Workers might need to opt in to a reciprocity agreement and meet other conditions. States that may have reciprocity agreements with other states include Arizona, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Ohio, Pennsylvania, Virginia, West Virginia, and Wisconsin, as well as Washington, D.C.
In states without reciprocity agreements, a remote worker may be eligible for a tax credit in one state, though they will likely need to file an income tax return in both states. A few states provide “reverse tax credits,” which alleviate double taxation by crediting a worker for taxes paid to their state of residence when their wages are also subject to personal income tax in the source state.
Unfortunately, income tax laws and relevant exceptions, credits, and reciprocity agreements vary by state (and locality) and circumstance. It is best to consult a tax professional if you are unsure of your tax obligations.
