The pandemic has accelerated the transition to remote working and with it the possibility that those workers can live wherever they want. That could lead to a higher standard of living and a lower income tax rate for the growing number of teleworkers. But in some cases, it could mean paying taxes for a place where they don't live or work right now – or even are taxed twice on the same income
It can be a very complicated situation, and the internet is rich with people trying to figure out what's going on. In particular, Reddit is full of questions about where remote workers should file their taxes this year: if you Quarantined with relatives for a few months in a state other than where you work, but you haven't updated your tax deductions, do you need to file two tax returns? like you worked remotely in a state with no income tax but your job is in a state that has income tax, do you have to pay it? What do you do when you are? taxed by a state that you have not set foot in
The answers are, unsatisfactory, depending on a number of factors, including which states and how long you were there, according to tax experts we spoke with. Ahead of tax season, here's what to look for when filing your tax on remote work.
The riddle of the convenience rule
Generally, your income tax is based on where you are physically located when you earn the income. So if your job's office is in State A, but because of the pandemic you live and work full-time in State B, you will pay income and all other taxes to State B. If State B has lower income taxes than State BA, that would be a are a blessing for growers who have relocated. It could also be a reason for more people to compete now that they are less tied to the office.
Taxes are of course more complicated than that, especially if your job happens to be based on one of the employer's seven convenience states, or & # 39; convenience rule & # 39; states – Arkansas, Connecticut, Delaware, Nebraska, New York, Pennsylvania and, since the pandemic, Massachusetts – while living and working elsewhere.
The convenience rule can require employees to pay income tax to states where they may now never intervene again, because income is taxed based on the location of the employer's office. When this happens, the state where the person lives will grant a tax credit to offset the taxes in the state where that person works. But in some cases, when the worker lives and works entirely in a state, that state would rightly want to tax that income and not offset taxes for the non-living, non-working state, leading to double taxation cases, according to tax policy non-profit Tax Foundation.
To avoid this, it is important to notify your job where you live so that it can withhold tax from the correct state. It is also important to consult a tax advisor as the tax situation – as well as what it takes to be a resident of that particular state – varies greatly from state to state and is far from intuitive.
If your job is in California, but you live full-time and work remotely in Texas, for example, then you don't have to pay tax on your pay as Texas has no income tax. If your job is in New York, a convenience rule, but you lived and worked in Texas, you should pay New York income tax. If your job is in New York, but you've lived and worked in Virginia, you may be required to pay income tax in both states. Even when states grant credit, employees will have to bear that double tax burden until their tax returns come.
So the convenience rule can feel very unfair.
"If you don't do anything to make use of those states' government services or resources, it not only seems unfair, but it also creates conflicts with every other state's income tax law," said Jared Walczak, vice president of the United States. state projects at Tax Foundation, Recode said.
Pay extra attention this tax season
As with many things that happened during the pandemic, remote work decisions often came quickly and without much planning. As a result, the majority of Americans who worked remotely during the pandemic were unaware of the potential tax implications of remote working and did not know that they should adjust the withholding tax to where they actually lived. Harris Poll on behalf of the American Institute of CPAs (AICPA). Almost half were unaware that every state has different laws regarding remote work.
It's also not clear how many people are moving to different states to work remotely as there is a delay in the IRS data. But move data from United Van Lines suggests last year that people are increasingly moving from states with high taxes to states with lower or no income taxes. A McKinsey Global Institute Analysis of 800 Jobs found that the ability to work remotely is highly concentrated in a handful of highly skilled professions and industries, including finance, management, professional services and information technology.
Catherine Stanton, vice chair of the AICPA's state and local tax committee, says she has raised an increasing number of questions about remote out-of-state situations from clients, both employees and employers.
"I think it certainly happens a lot," said Stanton. And depending on where your job is and where you live, it can be financially beneficial. “I think it's a great strategy,” she added, “but you have to make sure you're not working for those employers who are lazy about the employer rules, and maybe you put pressure on those employers to get an office elsewhere. to set up."
For example, if you work at a larger company, they can assign you to an office outside of the states of convenience rules, so you can avoid being taxed by a state you're not in, Stanton said. Walczak of the Tax Foundation said that by looking for short-term tax windfalls, convenience rule states could lose tax benefits in the long run by pushing businesses elsewhere.
It should also be noted that states with no income tax often make up for this with higher sales, real estate, and other taxes. There are tradeoffs between what those states buy with that tax (think schools and roads).
For now, some governments are trying to ease the situation. A number of states have allowed people currently telecommuting to be taxed in the state where their job is located. New Hampshire, where many people who work, live and work for businesses in Massachusetts, filed suit in the Supreme Court over Massachusetts, continue to collect income tax for people who work remotely in New Hampshire, which does not collect income tax. A number of other states, including New Jersey, Connecticut and Iowa have filed amicus letters in the case. There is also a twofold interest at the federal level to stop the practice, including proposed legislation called the Multi-State Worker Tax Fairness Act of 2020 that would only tax teleworkers at their place of residence.
But for now, outside workers – and tax professionals – will have to navigate the maze of national tax laws one by one.