COVID-19 forced us to make a lot of adjustments on the fly. Principal among them: a shift to a digital workforce. Companies learned that employees don’t need to be in the office to be productive. There may have been an adjustment period as workers got used to tools like Zoom and Slack. But the time saved by not commuting into work or getting distracted by in-person conversations with coworkers was a nice trade-off.
Some companies have explored a hybrid setup; perhaps one to two days a week in the office, or inviting employees to work in shifts so they can safely remain socially distant.
Others have stuck to a remote-only policy for the past year, and will continue to do so for the foreseeable future. Because of that, some people may be working from a different state than the one they typically work in — and that gets complicated during tax season.
Tax ramifications of living in one state and working in another
States can tax your income where you live and where you work. For many people, that’s the same state. However, there are also occasions when a worker may live in one state — say, Vermont — while working in another, like New York.
Seventeen states have reciprocity agreements to keep tax obligations simple. For example, Virginia and Washington, D.C. have this type of agreement; if someone lives in, say, Fairfax, Va. but works in D.C., they only owe taxes in their home state of Virginia.
In most cases, though, the state where the employee worked would tax them on their wages, while their home state would tax them on all income from all sources.
Let’s look at someone who lives in North Carolina but works in South Carolina. Normally, they would be taxed at South Carolina’s rate (which could be as high as 7%) on all wages earned at work. Then, North Carolina would tax their income at its flat 5.25% rate on all income from all sources.
To avoid double taxation, most states offer a credit for taxes paid to other states on earned income. In this case, the worker would file for their North Carolina tax returns and reduce their liability by what they paid in South Carolina. There’s a bit of complexity around dealing with two different tax codes, and because of varying tax rates, there may still be some additional income owed. Generally, though, this relieves taxpayers of paying double on their taxes.
A variant of this is publicly visible with professional athletes, who are charged “jock taxes” based on where they play their games. A player on the Dallas Mavericks, for example, would pay state taxes in Texas for their home games, but would pay Colorado state taxes for a road game against the Denver Nuggets.
However, the post-pandemic workplace has changed for a lot of employees. Rather than spending an hour (or more) commuting into the office, people are choosing to stay at home. That North Carolina resident is now working in North Carolina, as well, so the tax liability is only in one state, instead of two.
That seems like it would make things easier, and for many states, it does. But for seven states with “convenience of the employer” or “income sourcing” rules, it could potentially lead to double taxation.
The states with tax convenience rules
These rules offer a broad definition of convenience. Namely, the only exceptions are if you would have to be in person to do your job, like a healthcare worker or a plumber. But if you work remotely, you could theoretically do your job from anywhere. The convenience rules are designed to limit the burden of the employer, avoiding the complexity of having it calculate taxes for a state other than the one it conducts business in.
Six states — Arkansas, Connecticut, Delaware, Nebraska, New York and Pennsylvania — had implemented these convenience rules before the COVID-19 pandemic. Massachusetts has since adopted a temporary income sourcing rule in the wake of the new pandemic workforce.
The move by Massachusetts drew the ire of government officials in neighboring New Hampshire, which has no wage income tax. If an employee lives in New Hampshire but has an office in Boston, they’ll owe income taxes to Massachusetts, even if they’ve been working from home during the pandemic. Because there’s no state income tax in New Hampshire, there’s no risk of double taxation.
However, there are plenty of occasions where an employee might typically live in a state with income tax and work in a state with these convenience rules. And depending on the states, you could be taxed twice, even if you only worked in your home state during the pandemic.
Several states are vague about the applications of their laws. Vermont explicitly says a worker has to be physically present in another state to merit a tax credit. Some states, such as New York, are putting the onus of taxation on the employer. If you lived in a neighboring state, like Vermont, and worked in New York, your employer would have to establish a “bona fide employer office at your telecommuting location.”
What to do if you live in one of these states
Congress has been considering fixes for these situations, such as The Multi-State Worker Tax Fairness Act, which would restrict states in how they tax nonresident telecommuters. There’s also the Health, Economic Assistance, Liability Protection and Schools (HEALS) Act; that act includes a temporary provision that partially limits double taxation through 2024.
Since this is a fluid situation, you should check with the government of both the state you typically live and work in to see if there have been any recent updates.
Many states (even beyond the ones with convenience rules) are also making adjustments throughout the pandemic. And we may still see credits for 2022 after taxes are processed for this year.
Should you end up having to pay taxes to two states, you may be able to deduct some of your expenses — such as home office equipment, car mileage reimbursement or homeowners insurance and property taxes — which could help offset some of the tax burden.
If you’re concerned you’re under or overreporting your taxes, double-check with an accountant or other tax professional before submitting. Many online tax filing systems also offer support systems to confirm you’re providing the most accurate numbers.