The pandemic has accelerated the move to remote work and with it the possibility that those employees can live anywhere they please. That could mean a higher standard of living and a lower income tax rate for the growing number of remote workers. But in some instances it could mean having to pay taxes for a place where they now neither live nor work — or even being taxed on the same income twice.
It can be a very complicated situation, and the internet abounds with people trying to figure out what’s going on. Reddit, specifically, is full of questions about where remote workers should file their taxes this year: If you quarantined with family for a couple months in a different state than where you work but didn’t update your tax withholdings, do you have to file two state tax returns? If you worked remotely in a state without income tax but your job is in a state that has income tax, do you have to pay it? What do you do if you’re being taxed by a state you haven’t set foot in?
The answers, unsatisfyingly, depend on a number of factors, including which states and how long you were there, according to tax experts we spoke with. Ahead of tax season, here’s what to look out for when filing your taxes on remote work.
The convenience rule conundrum
Generally, your income tax is based on where you’re physically located when earning the income. So, if your job’s office is in state A, but because of the pandemic you’re living and working full time in state B, you’d pay income and all other taxes to state B. If state B has lower income taxes than state A, that would be a boon for remote workers who moved. It could also be a reason for more people to pull up stakes now that they’re less tethered to the office.
Taxes are, of course, more complicated than that, especially if your job happens to be based in one of seven convenience of the employer, or “convenience rule,” states — Arkansas, Connecticut, Delaware, Nebraska, New York, Pennsylvania and, since the pandemic, Massachusetts — while you’re living and working elsewhere.
The convenience rule can obligate employees to pay income tax to states they might now never step foot in, since it taxes income based on the location of the employer’s office. Typically, when this happens, the state where the person lives would award a tax credit to offset taxes in the state where that person works. But in some cases, when the worker is totally living and working in a state, that state might rightfully want to tax that income and not offset taxes for the non-living, non-working state, leading to cases of double taxation, according to tax policy nonprofit Tax Foundation.
To avoid this, it’s important to notify your job where you’re living so it can withhold tax from the correct state. It’s also important to consult a tax professional, since the tax situation — as well as what it takes to be a resident of that particular state — varies drastically by state and is far from intuitive.
If your job is in California but you’re living full-time and working remotely in Texas, for example, you wouldn’t have to pay taxes on your wages, since Texas doesn’t have income tax. If your job is in New York, a convenience rule state, but you lived and worked in Texas, you would have to pay New York income tax. If your job is in New York but you lived and worked in Virginia, it’s possible you’d have to pay income tax in both states. Even when states provide a credit, workers will have to shoulder that double tax burden until their tax returns come.
So the convenience rule can feel very inequitable.
“If you’re not doing anything to avail yourself of that states’ government services or resources, not only does it seem unfair but it creates conflicts with every other state’s income tax code,” Jared Walczak, vice president of state projects at Tax Foundation, told Recode.
Pay extra-close attention this tax season
As with many things that happened during the pandemic, decisions about remote work often happened swiftly and without much planning. As a result, the majority of Americans who worked remotely during the pandemic weren’t aware of the possible tax consequences of working remotely and weren’t aware they had to change state tax withholding to match where they were actually living, according to a Harris Poll on behalf of the American Institute of CPAs (AICPA). Nearly half didn’t know each state has different laws related to remote work.
It’s also not clear how many people are moving to different states to work remotely, since there’s a lag in IRS data. But moving data from United Van Lines last year suggests people are increasingly moving from states with high taxes to states with lower or no income taxes. A McKinsey Global Institute analysis of 800 jobs found that the ability to work remotely is highly concentrated in a handful of high-skill occupations and industries, including finance, management, professional services, and information technology.
Catherine Stanton, past chair of the AICPA’s state and local tax committee, says she’s fielded an increasing number of questions about out-of-state remote situations from clients, both employees and employers.
“I think it’s happening a lot, for sure,” Stanton said. And depending on where your job is and where you live, it can be financially beneficial. “I think it’s a great strategy,” she added, “but you have to make sure you’re not working for those employers that have convenience of the employer rules and then maybe you pressure those employers to set up an office somewhere else.”
If you work at a larger company, for example, they can assign you to an office outside of convenience rule states so you can avoid being taxed by a state you aren’t in, Stanton said. The Tax Foundation’s Walczak said that by looking for short-term tax windfalls, convenience rule states might lose long-term tax gains by driving businesses elsewhere.
One should also note that states without income tax often make up for it with higher sales, property, and other taxes. There are trade-offs between what those states buy with that tax (think schools and roads).
For now, some governments are trying to alleviate the situation. A number of states have allowed people currently telecommuting to be taxed in the state where their job is located. New Hampshire, where many people who work for firms in Massachusetts currently live and work, filed suit in the Supreme Court over Massachusetts continuing to collect income tax on people working remotely in New Hampshire, which doesn’t collect income tax. A number of other states, including New Jersey, Connecticut, and Iowa, have filed amicus briefs in the case. There’s also bipartisan interest at the federal level to stop the practice, including proposed legislation called the Multi-State Worker Tax Fairness Act of 2020 that would tax remote workers by residence only.
For now, though, remote employees — and tax professionals — are going to have to navigate labyrinthine state tax laws one by one.