State and Local Tax Considerations of Remote Work Arrangements

Suppose your temporarily remote employee typically works in the same state or location as your organization but currently works remotely in another state. For a state to consider someone a temporary worker, you must expect the temporary remote worker to return to their permanent location. Otherwise, state governments consider them permanent residents of the other state. If you have employees who recently moved to a new state and worked remotely, they’ll need to establish a new domicile, or permanent residence, to avoid being taxed in both their current and former states.

• Although you can’t take federal tax deductions for work-from-home expenses, if you are an employee, some states have enacted their own laws requiring employers to reimburse employees for necessary business expenses or allowing them to deduct unreimbursed employee expenses on their state tax returns.
• That said, it takes a lot to prove that you have to work from home, and an impossible commute does not count.
• These fundamental concepts are frequently difficult to implement for employers and administer by governments in the context of multistate remote work and business travel, due in part to the non-uniform aspects of state withholding laws.
• … It is evident that these operations establish sufficient contacts or ties with the state of the forum to make it reasonable and just, according to our traditional conception of fair play and substantial justice, to permit the state to enforce the obligations which appellant has incurred there.
• For instance, the Connecticut and New Jersey convenience test is inextricably related to the New York test because it is retaliatory in nature, that is, it applies only to nonresidents of other states that also have adopted the test.
• Often, employee-based income taxes are based on the state where you generate income, not where the revenue itself is generated.

Notably, the above cases involved remote workers who permanently worked out their homes – the out-of-state employment was not incidental to any work they performed at their respective employers’ locations. States, like New York, that have implemented such forms, have streamlined audit and enforcement processes for taxpayers and revenue administrators. Consequently, assuming an exception to source taxation does not apply, the likely effect for many employees teleworking as a result of work-from-home policies is that the employee’s resident state tax should be withheld or, if applicable, the current amount withheld should be increased. Therefore, an employer’s tax exposure may be with the resident state if such withholding is not adjusted to account for work-from-home policies. Finally, policymakers should consider adopting one of the model laws that establish brightline thresholds for determining when an employer must withhold from wages paid to their nonresident employees on business travel. For now, though, remote employees — and tax professionals — are going to have to navigate labyrinthine state tax laws one by one.

If I Work Remotely Where Do I Pay Taxes? A Remote Worker’s Guide to Filing Taxes in Different States in the USA (Updated for

The employee could create a permanent establishment for the U.S. employer in Canada, with the extra tax obligations this entails. The Canadian employee needs to ensure the foreign employer withholds the right amount of tax. If you spent most of the year living out of a van or bouncing between Airbnbs, you probably want professional help with your taxes.

• Whether due to a disinterest in addressing the issue or questions over standing, the U.S.
• All of this comes at a time when more employers are enforcing RTO mandates (return to office), and some that once assured their employees during the pandemic that they would be able to continuously work from home, are now reneging.
• You’ll want to know exactly what state you’re considered a tax resident in before you file your taxes each year.
• The only serious question raised by the case is one of policy—whether, in our increasingly mobile society in which telecommuting employees are commonplace, it is appropriate for the existence of a single employee to trigger an income tax obligation for an out-of-state corporation.
• These local laws vary widely by jurisdiction, thereby creating significant compliance (and enforcement) issues, which may involve business interruption for failing to comply.
• The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions.

However, when employees work remotely from another state, things can get complicated. Generally, the state where your employee lives and works is the one that taxes them. You https://remotemode.net/ should speak with the labor and unemployment agencies of each state your employees live and work in to ensure you follow all the proper tax procedures and withholdings.

How taxes are paid for full-time remote workers

For instance, Philadelphia took the position that if employees living outside the city were required to work from home by the employer because of the pandemic, those individuals were not subject to the city’s wage tax. Conversely, Pennsylvania took the position that employees working in a different jurisdiction solely by virtue of the pandemic would be treated as if they were in whichever jurisdiction they would have been pre-pandemic. All of these apportionment changes can first be expected to affect quarterly financial statement reporting and estimated payments, then ultimately the preparation and filing of state and local income and franchise tax returns. Apportionment drives the calculation of state taxable income or the taxable portion of a state’s franchise tax base. It also is a key driver of a taxpayer’s effective tax rate for financial statement reporting of current and deferred taxes.

If you’re working in a state that has a reciprocal tax agreement with your home state, then your work state shouldn’t withhold taxes from your paycheck, and you won’t be required to file a return for both states. In Tyler Pipe Industries v. Washington Department of Revenue, the Supreme Court again considered the extent to which an independent contractor’s activities in a state created nexus for a corporate taxpayer. In this case, the taxpayer had no office, property or employees in the state and used independent contractors who acted daily on its behalf to solicit sales, call on customers and maintain and improve the seller’s name and recognition. Ultimately, the Supreme Court held that the independent contractors helped the taxpayer in advancing a market in the state, making the nexus sufficient for the imposition of tax.

State Taxes for Remote Work—Who Do I Pay Taxes To, Anyway?

If you reside in multiple states and have a home in each of them, the place where you spend most of your time is often your domicile state (where you live). For example, if you spend 183 days in one state and 182 in another, you’ll be billed for the former, as it’s technically where you spend most of your time living. Most other self-prep platforms charge around that amount for each state return, so you could save $50+ just by filing with us. Thankfully, only a handful of states—Arkansas, how are remote jobs taxed Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania—use the Convenience of Employer rule to at least some degree. For example, if your employer state considers you a statutory resident if you spend more than half the year there, count days to make sure you don’t cross that line. State taxes can be complicated, so before heading out to fulfill your wanderlust or escape wintry weather, understand what may be in store for you come tax season.

The former approach is called “market-based” sourcing, whereas the latter—and more relevant here—approach is “costs of performance” sourcing. POLICY CONSIDERATION AND BEST PRACTICE – Policymakers should consider entering their state into reciprocity agreements with other states for personal income tax and employer wage withholding purposes, to the extent they have not done so already. These agreements simplify tax enforcement and compliance by taxing individuals on a residence-basis.

Frequently Asked Questions (FAQ) about remote work taxes ❓❓❓

Although you can’t take federal tax deductions for work-from-home expenses, if you are an employee, some states have enacted their own laws requiring employers to reimburse employees for necessary business expenses or allowing them to deduct unreimbursed employee expenses on their state tax returns. There is also some proposed legislation that would specifically address the taxation of remote workers. For example, the Remote Worker State Income Tax Fairness Act would require all states to allow remote workers to choose to pay state income tax in the state where they are a resident, even if they are physically located in another state.

Sourcing of payroll for apportionment purposes usually either follows a hierarchy similar to that used for unemployment compensation purposes or is based on employee withholding rules, as discussed in greater detail below. Therefore, the shifting of employee work locations, whether on a permanent or hybrid basis, has the potential to affect the payroll factor. Again, it is important to note that in order to apply this, the employer must have reliable data on the remote work location and wages. Generally speaking, a remote employee will create nexus for the employer for tax purposes and — as Telebright illustrates — such connection will likely withstand constitutional scrutiny.