This year over 26% million Americans are working remotely. In response to the pandemic, many people around the world quickly shifted from working at the office to working at home. To adjust to the speed of this transition, many states offered a pandemic-related reprieve that resulted in no tax filing obligations for remote workers. That was in 2020, but now some states have removed or changed this provision.
This has complicated things, as different states are dropping this COVID-19 relief reprieve, many remote workers can now owe taxes they did not expect to owe. As a result, you could face a tax liability – if you didn’t withhold outside your home state or the state where you worked remotely.
To further complicate things, many states have different approaches for when they expect you to report income earned there. For remote workers, whatever state you are a resident of gets your tax wages, not the state that you earned it in. However, you might have a tax liability in another state if you earn money or work there or if it’s where your company is located, depending of course on the state.
Different state tax rules for remote workers
For remote workers, this means, all of the differences in rules between states will affect you. For instance, some states have aggressive timelines for when you need to begin reporting withholdings for nonresidents who work there for more than 30-to-60-days – 26 states require it from day one.
Examples of State Tax Practices For Remote Workers:
- Source Income Principle – some states have the right to tax income that was earned in their states. For example, if an employee lives in Kansas and works in Missouri – Missouri is the source of income as the employee performed the work in that state. Thus, the employer would withhold Missouri taxes for the Kansas resident employee.
- Reciprocal Agreement – if your residing state has this pact where you work, you won’t have to pay both jurisdictions. For example, if you live in Maryland but work in the District of Columbia then you only need to worry about tax withholdings in Maryland. Some states with reciprocal agreement include; Virginia, Washington DC, Illinois New Jersey, to name a few.
- Waged-Based Threshold -based on wage earned.
- Convenience Rule – impose a “convenience of employer” test for remote workers. The convenience rule can obligate employees to pay income tax to states based on the location of the employer’s office. If your company is located in one of these states, you will generally have to pay higher taxes. (e.g., Connecticut, Delaware, Nebraska, New York, and Pennsylvania impose this tax).
- Company Required Remote – in these cases, if the company asked you to work remotely then your company is required to pay for it.
Some states have inconsistent rules, which makes things turn ugly real quick. If you’re a Michigan resident, for example, all of your income is subject to Michigan tax, regardless of where it was earned. Funny enough, Michigan, along with a few other states, requires someone who is a nonresident to pay state income taxes on the first day the employee starts working remotely.
There are six states that define working remotely depending on where you desk is located and if the remote work is not required by the employer at a genuine work location (Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania)
Look for changes to come
As the number of remote workers grows, expect to see changes to the tax laws intended to help remote workers. For example, a bipartisan bill in the Senate, the Remote and Mobile Workers Relief Act of 2021, prevents state tax or requires holding on nonresident employees who are in a state for less than 30 days (for this year, it is 90-days). Another Senate bill seeks to constrain the ability of states to impose “convenience of employer” rules on nonresidents.
Other states are changing rules on how long a person can work there without being taxed. Employers are also interested in working to make conditions easier for them to hire remotely. In these cases, employees need to be communicating with remote workers on what they should be claiming and how to claim it.
Things you can do now
With the number of remote positions available. Some remote workers are working in 3 or more states. Some of these remote workers themselves are nomadic, traveling around while working remotely. Unfortunately, many of these workers do not keep detailed notes, tracking the number of days worked out of state and in which state.
If you are a remote worker, working in one or more non-resident states, then you should be keeping track of the number of hours you are working and where. This can easily be done using a spreadsheet or there are many work time tracking apps that log work hours. Some of the apps can even let you set reminders.
Don’t forget to also familiarize yourself with the laws in your resident state and remote working states.
To avoid the headache of trying to figure out your 2021 returns you should consult a professional. Reach out to Herman & Company – Accounting & Consulting with any questions. We are trained tax professionals who can help you navigate state and federal tax laws regarding remote work, whether you are an employee or an employer.