Can Remote Work Change Your State Income Tax?

As many of us adjust to the reality of remote work, a new complication has set in: what to do about our state taxes. Many people have a situation where they live in one state and commute to a job in another. Now that many people are working from home, the question has arisen: Do you still have to pay taxes in another state if you’re not actually commuting to work there?

When we consider the taxes on our wages, we typically contemplate items such as federal income taxes paid through withholdings and other payroll taxes used to fund the Social Security and Medicare programs. As we all learned when we received our first paycheck, these amounts are significant. We often minimize the relevance of state income taxes because they are relatively smaller than the amounts due to the federal government. However, they still represent a significant reduction of the wages we are allowed to keep. All but nine states have their own income tax systems, with top marginal tax rates ranging from a low of near 3 percent to a high of over 13 percent depending on the state that is taxing the wages. And while we often find the rules of federal income taxation difficult to understand, the rules involving the corollary state programs can be even more complicated.

Typically, an individual will pay taxes on all their income to the state in which they reside. Residency is often defined as the location of an individual’s primary home or a location in which they have a second home and spend the majority of their time during the year. Even though a person may not reside in a particular state (commonly called a nonresident), they may be liable to pay taxes to that state if they earn income there. The most common of these items are wages earned for work performed in a particular state by a nonresident who commutes to their job location from their state of residency. In that situation, the wages are taxed not only by the person’s home state but also by the state in which they performed their work. Admittedly, most states mitigate this double taxation by providing a tax credit to their residents for income taxes paid to other states. However, for individuals who normally work in high-tax states but reside in ones with lower income taxes, many times this credit doesn’t entirely address the effect of the double taxation and they will ultimately pay more state income tax than their peers who live and work in their state of residence. Although the concepts of state income taxation are complicated on their own, they have been made even more so by the Covid pandemic.

Since so many employees are now working from home (at least temporarily) and away from their actual job site, a question arises as to the location where an individual performs their job and earns their wages and which state is able to tax those wages. Although no state income tax issues should arise when an individual both lives and works in their state of residence, the same is not true for so many people who normally commute from their home to another state to work, but are now forced to work from home. The primary question that arises in that situation is whether their wages are still being earned in the state in which their job is located such that it is able to tax them, or are those wages being earned in their home state because that is the location in which the work is performed. The complexity of this question is exacerbated by the fact the most state tax codes are different and may have varying answers to this question.

As the U.S. Congress continues to fashion responses to the Covid pandemic, they have also begun to consider this issue. Senate Republicans have recently put forth a proposal for supplemental legislation to the Coronavirus Aid, Relief, and Economic Security Act (Cares Act), known for now as the Health, Economic Assistance, Liability Protection, and Schools Act (Heals Act). One of the proposed provisions in the Heals Act addresses this little-contemplated question of state tax law in hopes of providing a uniform rule and simplifying state tax filings for affected workers. If passed, the Heals Act would modify state income tax rules by mandating that through 2024, employees who perform employment duties in multiple states would be subject to income tax only in their state of residence or any states in which they are present and performing employment duties for more than a limited time during the calendar year. Alternatively, the proposal would also allow employers to treat employee wages as earned in the state where an employee’s office is located and not in the state in which they are working from home. As noted in the proposed legislation, these provisions are intended to alleviate the confusion and create uniform procedures for assessing state income taxes on remote and mobile workers affected by government shutdown orders due to the Covid pandemic and changing work conditions during the economic recovery.

Generally, you must file Form 1040X within three years from the date you Because many workers currently find themselves in the situation discussed in this article, it’s strongly encouraged that they keep abreast of the congressional effort to address it and also seek guidance from their tax advisers concerning their particular state rules on the issue as they plan for their 2020 state income tax filings due next year.

If you need any assistance filing an amended return or have any questions about Form 1040X feel free to give our office a call at 850-435-8844.