The rising number of employees working remotely from their homes since the start of the Covid pandemic has raised taxation issues, with some states taxing individuals even if they work from their out-of-state homes.
In one notable case, Massachusetts has taxed thousands of New Hampshire residents who work for Massachusetts companies, even if they carry out their work from their homes and no longer cross into the Bay State. New Hampshire attempted to challenge its neighbor’s policy in a lawsuit, but the U.S. Supreme Court rejected the case.
“Employees who do not live in the state they [use for work are] continuing to be taxed by that non-resident state,” says Craig Richards, managing director and director of tax services at Fiduciary Trust International.
One of the most likely triggers of double taxation is the “convenience of employer” rule. Arkansas, Delaware, Nebraska, New York and Pennsylvania have such rules, while Connecticut, Massachusetts and New Jersey have variations of it.
Employees working for an employer in another state normally pay income taxes where they live. Under the “convenience” rule, however, employees residing in a state different from where the employer is located may have to pay taxes in both states. The thinking here is that the remote work situation is a “convenience,” and that the worker should be treated, for tax purposes, as someone who is working at the office.
Some states have “statutory resident” laws, Richards says, which may come into play where someone is domiciled in one state and has a place of abode in another and spends more than 183 days in that state.
“Most of the laws aren’t new, but more people working remotely or spending time in multiple states is bringing these issues to the forefront now,” Richards says.
For example, on its FAQ page for telecommuters, the New York State Department of Taxation and Finance stipulates that a telecommuter whose primary office is in New York but who worked virtually because of the pandemic must consider days spent telecommuting during the pandemic as days worked in New York “unless your employer has established a bona fide employer office at your telecommuting location.” A bona fide home office, for instance, has to be near or contain specialized facilities necessary for the job.
“You can generally only be domiciled in one state,” Richards says. “You typically would look at factors such as your home, family, business, near and dear items and where you spend most of your time. If you also have a place in another state that you own or rent, you need to be aware if that state has statutory residence rules if you plan on being there more than half the year.
“Changing your driver’s license or voter registration may come into play, but doing those things alone do not change your residency,” he adds.
The case involving New Hampshire and Massachusetts highlighted the issue, and could encourage more states to tax out-of-state workers, observers say. Tax scrutiny on tele-work could intensify with the expiration of pandemic-relief measures that temporarily loosened tax obligations for residency and remote work.
“The trend seems to be that employees want to work remotely and employers will need to be flexible to retain talent,” Richards says. “This will inevitably lead to states auditing taxpayers to not lose tax revenue.”
Remote workers classified as independent contractors might want to use an “ABC test” to fix their classifications, says Will Rogers, a private wealth advisor at Ameriprise Financial in Evans, Ga. An ABC test looks at behavioral, financial and relationship factors to determine whether a worker is truly an independent contractor or is in fact an employee, the latter triggering more obligations for the employer.
“I think states with significant surpluses will back away from this [residency and audit] trend, but for states that need money, it might continue in earnest,” Rogers adds.