If you were working remotely from one state in 2020 and your employer was in another, you could be in for a big state tax bill.
Say you were among those who rode out the pandemic in a different state from your own — for example, at a vacation home or your parent’s house.
Or maybe you simply worked from home, which happens to be in a state different from that of your employer, where you used to commute to work.
Either way, your home state and the other state may both lay claim to a piece of your earnings.
Here’s why: Every state sets its own tax laws governing how residents and nonresidents should be taxed on their income generated when working for in-state or out-of-state employers.
Add to that the fact that several states created temporary tax rules specific to the pandemic, and you can see how this gets messy fast.
The issue becomes more complicated still when an employee effectively stays in a new state for more than 183 days, thereby calling into question their official residency status.
“There’s a real criss-cross of rules that can affect taxpayers negatively,” said Tim Noonan, a partner and the tax residency practice leader at law firm Hodgson Russ LLP.
New York, for instance, indicated in informal guidance that during the pandemic it would tax the income of those working for in-state employers, but who were telecommuting from another state due to Covid-related workplace closings. (Normally, New York would not tax out-of-state employees if the decision for them to work remotely was based on their employer’s necessity, not their own convenience.)
Vermont clarified that any income earned by someone who was in the state for more than two weeks would be subject to the state’s income tax.
So the New Yorker who decamped for months to her Vermont vacation home and worked remotely for a New York-based employer is likely to owe income tax both to New York and Vermont, Noonan said.
Illinois said that the income of employees who performed normal job duties for more than 30 working days in Illinois would be subject to Illinois income tax.
Connecticut and Maine, meanwhile, issued rules that would protect their residents from double taxation at the state level for 2020.
The list goes on. But anyone who has been living and working between two states will need to find out what each state’s rules are and find out if either will give a tax credit for income taxes paid to another state.
All eyes on a potential Supreme Court case
The Covid crisis abruptly created tens of millions of remote workers overnight. And it showed employers how successfully their staffers could work away from the office. As a result, more companies now plan to offer their employees greater flexibility over when and where they work when the pandemic is over.
So individuals who choose to work remotely full- or part-time will be freer to move to new states and still keep their jobs.
That’s why tax experts are keeping a close eye on a case that the Supreme Court may take up this year, which calls into question the constitutionality of a state’s reach to tax the income of nonresidents.
New Hampshire is suing Massachusetts for imposing its income tax on New Hampshire residents, who previously had commuted to their jobs in Massachusetts but had been working from home in 2020 due to the pandemic.
The New Hampshire case is not one of double taxation per se — the state doesn’t have an income tax so its residents would pay no more in income tax than they ordinarily did when commuting to their jobs in Massachusetts. It’s a question of whether Massachusetts has violated New Hampshire’s sovereignty.
But if the Supreme Court rules in New Hampshire’s favor, that could establish as unconstitutional the practice of any state in similar circumstances taxing nonresidents for work they do outside of the state for an in-state employer, and therefore reduce the risk of double taxation in the future.
Pre-pandemic, six states (New York, Connecticut, Delaware, Nebraska, Pennsylvania and Arkansas) normally taxed nonresidents for remote work done from other states unless the decision to telecommute was made for the employer’s convenience.
If New Hampshire wins its case, Noonan said, “all states with [those] convenience rules will have to get rid of them.”
