Unfortunately for remote workers and their companies, there’s more to managing risk than remembering to change your withholding. Because each state has its own tax laws related to remote working, and because state and local budgets are lean these days, employees and their companies risk falling into an unintended tax trap.
Know the issues
Most companies and employees assume that remote workers are working from home. And that if you’re a remote worker, you’ll owe taxes to the state where your home is, assuming your state has personal income taxes.
But it’s important to know that, generally, there are two ways a state might classify a person as a resident:
- Domiciliary: The person has a permanent residence in the state and intends to remain there.
- Statutory: In many states, the person is considered a resident if they’ve spent more than six months there.
Many remote workers become statutory residents without even realizing it. As previously noted, New York state takes a robust approach to taxing remote workers. The state classifies a person a resident if they spend 183 days there and also have a permanent place of abode there. However, the state’s definition of one day is not 24 hours. If one were to cross into the state for a haircut and then leave 90 minutes later, that is a day, by New York’s classification standards. And “permanent place of abode” is a place, owned or rented, where the worker can live — for example, an apartment.
Exposure to double taxation is a very real threat for hapless remote workers. Consider a young professional who is sharing an apartment with friends in New York City but decided to shelter with relatives out of state during the pandemic. Not only will New York potentially tax her as a resident, based on domicile, but the state where she’s sheltering might also consider her a resident for tax purposes.
The employee’s company also faces a potential risk. If she’s sheltering in place in a state where the company doesn’t already have a presence, she could be creating a tax filing responsibility for the company, subjecting it to the taxes of that jurisdiction, taxes that might not otherwise apply.
Tax credits and safe harbors
Remote workers may receive a nonresident tax credit in their state of residence to offset the tax they’re required to pay the state in which they’re working. Additionally, some states have been providing a temporary safe harbor for state withholdings and tax liability for remote work performed in a different state during the pandemic. Some states have also temporarily waived the creation of a business nexus. However, lean state budgets suggest that these protections won’t last indefinitely; certain states have already lifted the emergency legislation or are seriously considering doing so.
Convenience or inconvenience?
Before the pandemic, 400,000 New Jersey residents were commuting to their jobs in New York. When those commuters stayed home to shelter in place, New York continued to tax their wages, applying the “convenience of the employer” test. Generally, under this rule, the source of the income is the employer’s location, where the individual worked prior to the pandemic.
Several states apply this test, but New York has spearheaded its application, issuing detailed guidance on its use. Roughly 15% of New York’s tax revenues are from out-of-state commuters, which explains the state’s stringent enforcement.