Because of the COVID-19 pandemic, many people have had to work remotely, either from home or from a temporary location. One unanticipated consequence of remote work could be an increase in your state tax bill.
During the pandemic, it was fairly common for people to work remotely from another state — across state lines from the employer’s location or even across the country. If this describes your situation, you may be required to file tax returns in both states, which may result in additional state taxes. However, the outcome is determined by the applicable law, which varies from state to state.
READ MORE: Don’t Neglect Internal Controls for Remote Work
Keep an eye out for double taxation
In general, a state’s ability to tax an individual’s income is based on concepts such as domicile and residence. If you are domiciled in a state, which means you have your “true, fixed permanent home” there, the state has the authority to tax your worldwide income. If you are a “resident,” your income may also be taxed by the state. Typically, this implies that you have a residence in the state and spend a minimal amount of time there.
It is possible to be domiciled in one state but a resident in another, which may necessitate paying taxes on the same income in both states. Many states provide relief from double taxation by granting credits for taxes paid to other states. However, remote work can still result in higher taxes, such as if the state where your employer is based and where you usually live has no income tax but you work remotely from a state that does.
A state may also be able to tax your income if it comes from within the state, even if you aren’t a resident or domiciliary. Several states have what are known as “convenience rules”: If you work for a company in the state but live and work in another state for your convenience (rather than because the job requires it), you must pay income taxes to the state where your employer is located.
If this occurs, you may also owe tax to the state in which you live, which may or may not be offset by credits for taxes paid to the other state. Some states have agreed not to levy taxes on remote workers who have arrived in their state due to the pandemic. However, there is a risk of double taxation in many other states.
READ MORE: What Home Office Expenses can I Deduct?
Understand Your Alternatives
If you’ve been working remotely from out of state, we can help determine whether you’re liable for taxes in both states. If so, there might be steps you can take to soften the blow.
Originally published March 2021. Updated November 2021.
©2021