How remote working may impact your tax filing this year

The benefit of working remotely either full time or part time tends to be the new welcomed normal for many of us. Are you aware of the state filing implications associated with working remotely and have you been in contact with your payroll department?

In brief

• The rules for reporting income to states’ tax departments can be complex and working remotely in one or more states will only add to the complexity.
• If you believe your W-2 does not accurately reflect the state(s) where you were living and/or working, you should contact your payroll department and you may need to request a corrected W-2.
• It is key to properly record your location when submitting your time to your employer, and/or keep a separate record of your workdays and work location.
• A tax professional can assist you in navigating state income tax reporting – EY TaxChat™ can help.

If you are working from your vacation home, or you are staying with parents or maybe in a different state you always wanted to visit, just be mindful that all these may trigger non-resident state tax filing complexities.

Most states: An employee’s physical presence dictates where tax is due

Most states tax you where you are physically present. All wages are taxable in your resident state, even if you pay tax in a non-resident state. In most cases, your resident state remedies this scenario of double taxation by allowing you to claim a credit for taxes you paid to the non-resident state. So, if you live and work in RI but travelled to NC for the summer during the pandemic, you would pay tax in both RI and NC but receive a credit on your RI return for the tax you paid to NC.

Some states have reciprocal tax agreements

The following states allow residents of one state to work in designated other states without having to file in the non-resident state if proper forms are submitted. If you work in any of the following states, but live in a designated reciprocal state, you may qualify for this reciprocity: AZ, DC, IL, IN, IA, KY, MD, MI, MN, MT, NJ, ND, OH, PA, VA, WV and WI.

Convenience of Employer States

This is a very technical rule and should be discussed with your tax preparer, but in general the way this rule works is that some states tax employees where their primary work location is, even if the employee doesn’t work in that state, if it is deemed that the out-of-state work is for the employee’s (not the employer’s) convenience. The rule is anything but convenient. The states that currently have this rule are: NY, DE, MA, NE, PA and CT applies it only if the taxpayer’s resident state applies a similar rule for work performed for a Connecticut employer.

For example, your primary office is in NY, but you decide you want to head to FL during the pandemic. Even though your office in NY was closed due to the pandemic, NY could deem you working outside of New York State (NYS) for your convenience (not your employer’s) and you would still have to pay tax to NY.

Here’s another example: Your primary office is in NY, but you live in NJ, and you are working from home. NYS has issued FAQs that say if you’re a non-resident whose primary office is in NY, your days telecommuting during the pandemic are considered days worked in the state, unless your employer has established a bona fide employer office at your telecommuting location. There are a number of factors that determine whether your employer has established a bona fide employer office at your telecommuting location. In general, unless your employer specifically acted to establish a bona fide employer office at your telecommuting location, you will continue to owe NYS income tax on income earned while telecommuting in NJ.

What if I don’t agree with my Form W-2?

You can request a corrected W-2 (W-2C) from your employer and/or discuss with your tax professional. If you don’t receive a W-2C and are filing based on your records of your work location, there are a few things to consider. If the tax based on your records does not align with the withholding on your W-2, then you could have a large balance due in one state and a large refund in another. If cash flow is an issue, it’s generally preferable to file the return with the refund as soon as possible and then the state return with the balance due as late as possible (but before the due date to avoid penalties and interest). Filing state returns based on your personal records could generate state tax notices because the returns filed may not match the W-2 that your employer submitted to the taxing authority.

• “If the tax based on your records does not align with the withholding on your W-2, then you could have a large balance due in one state and a large refund in another. If cash flow is an issue, it’s generally preferable to file the return with the refund as soon as possible and then the state return with the balance due as late as possible (but before the due date to avoid penalties and interest).”
• “Filing state returns based on your personal records could generate state tax notices because the returns filed may not match the W-2 that your employer submitted to the taxing authority.”

About EY TaxChat™

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This information is provided solely for educational purposes; it does not take into account any specific individual or entity’s facts and circumstances. It is not intended, and should not be relied upon, as tax, accounting or legal advice. Ernst & Young LLP expressly disclaims any liability in connection with the use of this presentation or its contents by any third party. Neither EY nor any member firm thereof shall bear any responsibility whatsoever for the content, accuracy or security of any third-party websites referenced.