When you left your office in March, you might have not known that it would be your last day there. Maybe you did, but you probably didn’t think that it would be your last day there for over three months. Whatever the situation was in your case, you probably scrambled to get a home office ready, or maybe you made plans to head somewhere else to ride out the storm of the coronavirus pandemic.
Some offices around the country have begun to reopen, or have begun to discuss reopening, but some organization’s have decided to keep this whole “working remotely” thing around for the long haul. Before you sign up to work remotely indefinitely, there is something you should think about. If you are completing the duties of your job from a state other than the one where your company is located, you may need to file returns and pay taxes in the state from which you are currently working.
“People dispersed pretty quickly when stay-at -home orders went into effect,” said Katherine Loughead, Senior Policy Analyst at the Tax Foundation. “A lot of my own colleagues went to different states to ride out the pandemic with their families and people weren’t thinking about how that could trigger income tax liability, not only just for them, but for their employers. I think we’ll see a lot of states that will unfortunately try to be stingy and enforce that as they are looking for revenue.”
How does working remotely affect your taxes?
If you are working in the same state in which your company is based, your taxes might not be affected at all. However, if you find yourself living, and therefore working remotely, in a state other than the one in which your company is based, your 2020 taxes might be a little different.
“Remote work is definitely having an impact on people’s taxes, both during the pandemic and generally…even without the pandemic, there’s definitely a ton of tax implications when it comes to telework,” Loughead said. “When an employee works in a different state than where their normal office is, for even a day, that can theoretically trigger tax liability in that state…even if that person is just on vacation and responding to a work email.”
Each state tax system has different rules that take into account how long an individual works there, what income is earned, and where the person’s true home is. Almost all states that have income tax have rules that impose them on workers who are only passing through. In almost half of the states in the country, the rules include people who are only passing through for one day.
While these rules are famous for affecting entertainers and athletes like Michael Jordan and Alex Rodriguez, they could have very real implications for someone working in a different state due to coronavirus-related office shutdowns.
You might be thinking, how will my state know if I went to another state to do my work? There are various ways a state could find out this information, according to the Wall Street Journal. This information could be uncovered by employers asking employees and tax preparers asking clients about where they are working from.
Both employers and tax preparers might be able to treat a small amount of work as de minims, meaning it is too minor to merit consideration, but this is a judgment call. Signing a false return can put a tax preparer’s license at risk, and those filing their own should remember that tax returns are signed under the penalty of perjury.
What states plan to tax remote workers?
As of now, 13 states and the District of Columbia have agreed not to enforce their remote work tax rules for individuals that were present because of the coronavirus.
Below are the areas that have said they won’t tax remote workers due to the pandemic:
- District of Columbia
- New Jersey
- Rhode Island
- South Carolina
New York and California are still set to tax remote workers for 2020. New York depends on high earners for a large percentage of its income-tax revenue. In May New York Governor Andrew Cuomo announced that, unless the state received more federal aid, the state would tax the health workers who came from out of state to help fight the coronavirus pandemic.
In New York, the policy is that if an individual’s company has an office within the state, the state taxes the worker, even if they work remotely from another state. So far, the state has not made any announcements about changes to this policy.
Some locations, like Maryland, Virginia, and the District of Columbia, have long had agreements with neighboring jurisdictions that allow commuters to file and pay tax where they live.
Could your income be taxed twice?
Working remotely from a state that is different from the one in which your company is based could lead to double taxation, according to Loughead. This possibility is one of the downsides to our federal system of government, she said.
While there are good things about the system, like the states have the ability to create their own tax code which fosters interstate competition that is usually good for the taxpayer, this possibility of being taxed twice also exists.
“If each state’s doing its own thing, that can lead to double taxation of the same income if people travel around a lot for work and each state is trying to tax its portion,” Loughead said. “That can create a lot of complexity and double taxation.”
What is the “convenience” rule?
This rule is likely to affect thousands of New Yorkers and other individual’s whose offices were closed to the pandemic. The “convenience” rule says that if a person has a job that is based in one state but they live and work in another based on connivence rather than employer requirement, then the individual owes income tax to the state in which the job is based.
For example, if someone who holds a New York-based job lives and telecommuters from another state, they will still owe full income tax to New York based on that compensation. If the state in which they live also taxes that income, and doesn’t give a credit for the New York tax, the individual will most likely be double taxed.
Could you owe lower taxes for 2020?
Some remote workers might come out on top for 2020 and owe lower total state taxes for the year if they are in a low-tax or no-tax state. If an individual works from a state with no tax for several months, they could avoid being taxed on the income that they earn while working in that state.
What should you do if you think your 2020 taxes might be affected by remote work?
“It makes sense for individuals to talk to their employers before potentially teleworking from other locations, and I’m sure a number of businesses have now come out and notified their employees to be aware of this reality,” Loughead said. “But of course, right now businesses have so many different major concerns they’re worrying about so I wouldn’t be surprised if a lot of companies didn’t even realize this was happening and are slow to getting around to it.”
As these are more complex issues than normal, tax advisers are recommending that remote workers act soon to see how their 2020 taxes will be affected by this sudden change. Professionals should speak with their employers to discuss where state taxes are being withheld while they are working remotely.
Taxpayers should consider tracking the days that they spent working in different states. Tax auditors usually use cell-phone or credit-card records to track an individual’s work location. It is important that you don’t file state returns that are inconsistent with these records, because doing so can lead to lots of money coming out of your wallet from the taxes due, interest, professional fees, and penalties for not getting your taxes right.
Jennifer Fabiano is an SEO reporter at Ladders.