Many workers relocated away from their places of employment during the pandemic. But remote workers, especially those no longer commuting to cities, wonder if they will have to pay taxes in two places.
States use several factors to determine whether they have the authority to tax a worker’s income, including the worker’s presence within their jurisdiction. And “as the time in lockdown increases, instructions are becoming scarce and inconsistent,” said Michael A. Raiken, a CPA and senior tax manager in the Cranbury, N.J., office of Prager Metis.
One advisor cited the example of someone working out of a vacation home. “If there is an income tax in the vacation state and the person stays long enough, they may make themselves subject to income tax in the vacation state,” said Lori Roberts, a CPA with PBMares in Fairfax, Va.
“Personal income taxes and withholdings should [usually] be sourced to where the employee is performing the services,” said Timothy Schuster, a senior manager in EisnerAmper’s private business services group in Iselin, N.J. “For example, a New Jersey company could have a worker that lives in Delaware who used to work in the company’s New Jersey location. Now as a result of working remotely from home, the wages and withholdings possibly are improperly sourced if still being reported as New Jersey wages.”
“All states with individual income tax have a provision to provide credit for taxes paid to another state where that same income is also subject to tax in the home state,” Roberts said.
Some states have reciprocal tax agreements with neighboring states, some have begun issuing telework guidance, and still others promise more relief as working from home continues to be widespread.
Many different laws can kick in when different states try to tap non-residents for income taxes. Complicating taxation further are the permutations as businesses start to bring employees back to the workforce in arrangements such as split-weeks and even split-days.
Raiken recommends taxpayers work with their employer to ensure adequate withholdings for the correct state. “Generally, state income tax is withheld and paid to the state in which the taxpayer’s services are performed, not necessarily the state in which the employee resides. Exceptions can apply for states that do not have an income tax or have reciprocal agreements,” he said.
Workers should track the number of days at each location where work is performed and retain documents to establish proper tax reporting and residency.
“Although an employer may know that their employee is working from home, the employee’s home address on record may not be where he or she is actually working,” said Kimberly Dula, a CPA and partner at Friedman LLP in Philadelphia. “Also, if during 2020 an employee is working from a variety of states, the W-2 may be very different than in years past. There may be withholding from multiple states, which could result in the employee having to file in additional states for 2020.”
“If a taxpayer thinks their employer is withholding taxes in the wrong state, they should not be afraid to ask questions,” added Clare Porreca, a CPA and principal with Drucker & Scaccetti in Philadelphia. “Individual taxpayers will ultimately not be taxed by two separate states on the same income.”
The issue could rise in prominence with 2020 tax deadlines just eight months away, tax professionals said.
“This has all the ingredients for a perfect storm when preparing 2020 income taxes,” added enrolled agent John Dundon, president of Taxpayer Advocacy Services in Englewood, Colo.