The proportion of U.S. employees working from home has fallen since the start of the COVID-19 crisis, but workers across the country are still clocking in from home offices. And as we head into tax season, many taxpayers around the country are wondering whether working from home impacts state taxes. (For context, Gallup recently revealed that the percentage of employees working from home all or part of the time had held steady in the 45-percent range from July to Sept. 2021.)
So many Americans are still working remotely, and when you live in one state and work for an employer in another, “things get complicated,” as Justin Gilmartin, managing director of tax services at The Colony Group in Boston, told U.S. News & World Report. So complicated, in fact, that some taxpayers face double taxation.
States have become “more and more aggressive” about getting tax revenue from remote workers
As U.S. News observed, employees who can work remotely may be tempted to move their residency from a place like Washington D.C., which has an individual income tax rate as high as 8.9 percent, to Wyoming, which does not charge a state income tax. But depending on the states in question, workers might face double the income tax burden—especially as states seek to recover revenue streams lost during the pandemic.
“If you work in a different state, those wages could be taxable in both your home state and the state where you perform the work,” Gilmartin explained. “Usually, your home state would give you a credit for any taxes you paid to that other state, but we've been seeing states become more and more aggressive.” This double burden can feel unfair, especially “if you’re not doing anything to avail yourself of that states’ government services or resources,” as Tax Foundation vice president of state projects Jared Walczak told Recode.
Tax credits designed to prevent income tax liability in more than one state don’t always cover the difference
If a remote employee works for companies based in Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, or Pennsylvania, for example—all of which have “convenience of the employer” rules—that employee would have tax liability both in that state and in the state of their residence, reports U.S. News. The aforementioned credits should “in theory” prevent workers from playing taxes to more than one state, Donna H. Laubscher, partner at Henry and Horne in Arizona, told U.S. News.
“But I do say ‘in theory,’” Laubscher added. “For example, if you live in Arizona and receive a 1099 from a company in California, you need to file a California tax return and include that income on an Arizona tax return. So you get a credit for paying tax in California, but because California rates are higher than the Arizona rates, it's generally not a one-to-one credit.”
In light of these tax wrinkles, Recode recommends telling your employer where you’re living (so it will withhold tax from the proper state) and consulting a tax professional, since these residency rules vary state by state.