The Telecommuting State Tax Battle
The shift to working remotely comes with tax return implications.
The pandemic has had many lasting effects, one of them being the way we work. Employees working remotely or on a hybrid schedule have become the new normal. This new work model, which appears to be here to stay indefinitely, presents a significant question as clients head into tax season: If someone lives in one state and telecommutes to another, what are the personal income tax implications?
Generally, an employee pays taxes in the jurisdiction in which the employee physically performs services. Even prior to the pandemic, however, six states—Arkansas, Connecticut, Delaware, Nebraska, New York and Pennsylvania—imposed a so-called “convenience-of-employer rule.” Pursuant to this rule, if employees work from home through the employer’s necessity, the employee will be taxed in the employee’s telecommuting location. If, however, the employee telecommutes for their own convenience, the employee’s wages for those workdays will be classified as if the employee was working from the employer’s physical office. With millions continuing to telecommute in the post-pandemic world, the convenience rule could tax employees as if physically working in the state of their employer’s office, despite never setting foot in that location.
At least 14 states—ranging from New Jersey to Utah—issued briefs siding with New Hampshire when that state filed a Motion for Leave to File a Bill of Complaint against Massachusetts in the U.S. Supreme Court, challenging a state’s constitutional authority to tax a nonresident who’s telecommuting from their home state and neither lives nor physically works in the taxing state. On June 28, 2021, the Supreme Court denied New Hampshire’s motion. Accordingly, the convenience-of-employer rule remains intact for now, making it prudent for taxpayers to keep careful track of days worked remotely, particularly because tax credits may not eliminate double taxation.
States that issued guidance for 2022 regarding the tax impact of telecommuting include:
Kansas. This state enacted legislation giving employers the option to continue to withhold income taxes based on the state of the employee’s primary work location and not based on the state where the employee is temporarily teleworking from Jan. 1, 2021 through Dec. 31, 2022.
Missouri. This state’s Department of Revenue published guidance confirming that the wages of an employee performing services for an employer in exchange for wages in Missouri are subject to Missouri withholding. This applies in the case of remote work when an employee is located in Missouri and performs services for the employer on a remote basis. If a non-resident employee working remotely performs all of their services outside of Missouri for a Missouri-based employer, the wages paid to that employee aren’t subject to Missouri taxes.
New Jersey. Currently, New Jersey offers its residents a tax credit for taxes paid to other states, such as New York, in order for its residents to avoid double taxation. According to New Jersey’s amicus brief in support of New Hampshire’s Motion, New Jersey may have credited up to $1.2 billion to its residents for taxes paid to New York while working at home in New Jersey just for the 12-month period beginning March 2020. In a showing that perhaps enough is enough, New Jersey introduced bipartisan legislation that, according to the Office of the Governor of New Jersey (the Office) “is designed to provide relief to New Jersey residents facing unfair taxation from other states where their employer is based.” According to the Office, the long-standing practice of issuing tax credits to residents who pay taxes to other jurisdictions has cost the state billions in foregone revenue. The legislation contains three proposals. The first is to adopt New Jersey’s own convenience-of-employer rule to permit the state to tax employees of New Jersey employers if they reside in another state and work from home for their own convenience (instead of the employer’s need). A stated objective is to create parity with New York. The second proposal would incentivize New Jersey residents with tax credits to challenge other states that collect taxes for services the employees performed while physically located in New Jersey. The third proposal would create a one-time $10 million pilot program to incentivize job growth and capital investments throughout the state by providing grants to businesses that assign their employees to New Jersey locations.
South Carolina. The South Carolina Department of Revenue extended until March 31, 2022 its COVID-19 relief period guidance that South Carolina won’t use the temporary change of an employee’s work location during the COVID-19 relief period to impose a South Carolina withholding requirement. The relief doesn’t apply to workers whose status changes from temporary to permanent. Accordingly, the wages of nonresident employees temporarily working remotely in another state instead of their South Carolina business location are still subject to South Carolina withholding. The wages of a South Carolina resident employee temporarily working remotely from South Carolina instead of their normal out-of-state business location aren’t subject to South Carolina withholding if the employer is withholding income taxes on behalf of the other state.
Vermont. Employees who live and work remotely in Vermont are subject to Vermont income tax on income earned during the entire period that they live in Vermont. This is true even if the employee claims another state as their domicile or if the work the employee performs is remote for a company that isn’t located in Vermont. The Vermont Department of Taxes issued guidance providing that, although all income earned in Vermont is considered Vermont income, employers aren’t required to begin withholding Vermont income tax from a nonresident employee’s wages until that employee has been working from a Vermont location for 30 days. This applies to employees working from a home, rental property, a co-work space or any other location within Vermont.