One of the few good things to come out of the pandemic is the acceptance and popularity of remote work. With mandatory shutdowns, companies were forced to allow employees to work from home. Many companies learned that meetings did not have to be in-person, sitting at your desk didn’t equal productivity, and working 9 to 5 didn’t need to be so rigid. For many companies, it also meant their pool of employee candidates wasn’t restricted to their city or state.
The ability to work remotely allowed couples to relocate for one spouse’s job without requiring the other spouse to find a new employer, which is generally great news for everyone involved—until it came to state income taxes.
Generally, workers file state income tax returns for the state where they live. With almost everyone commuting to work, most taxpayers never thought twice about this “rule.” However, each state has different rules regarding its income tax, resulting in many remote workers being taxed twice because they are required to file a state tax return where their employer is located and where they live.
Some states have a reciprocal tax agreement allowing workers to only file where they live. Unfortunately, some states do require you to file in both states. Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New Jersey, New York, and Pennsylvania follow some version of the “convenience of employer” rule that considers remote workers as reporting to the office; therefore, they are taxed in that state as well. The exception to this rule is if the remote employee works in a different state because the job requires it. For example, if a company required an employee to work in another state because they needed access to a facility there, the employee would be exempt from the convenience rule. It’s also important to note that the state enforces the convenience rule—not the employer.
Unfortunately, this could become quite a shock during tax time, so if you’re in this situation, now is the time to talk to your CPA or tax adviser to ensure you are being taxed fairly and appropriately. Federal law prevents two states from being able to tax the same income. Depending on your state of domicile, you may be eligible for a state tax credit for taxes paid to another state. However, reciprocity agreements are different—these agreements allow you to request an exemption from tax withholding in another state.
While some remote workers are dealing with double taxation, others may be “escaping” state tax altogether if they reside in a state without an income tax. Residents of Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming do not pay a state income tax. So, for example, if you live in Tennessee and work in a different state, you are usually subject to the reciprocity laws of your employer’s state. As each state’s rules are different, it can be complicated.
And because most everyone asks: No, remote workers earning a W-2 from their employer—even if they are in a different state from their employer—are not eligible for a home office deduction. The Tax Cuts and Jobs Act suspended the business use of home deduction from 2018 through 2025 for employees.
If you have questions on how remote work affects your state taxes, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the November 12, 2022 “Henssler Money Talks” episode.
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