Taxpayers who moved to another state during the pandemic to work remotely have been dealing with more complicated tax issues, and so have their employers!
The pandemic prompted many people to sell or rent their homes to relocate to larger houses and across state lines, creating complex multistate tax issues on both the individual and the business tax side. While many states offered tax relief in the first year of the pandemic, they won’t be so forgiving in 2022.
Add to the confusion that there are special rules for people who are telecommuting or working remotely that differ from state to state. With so many people relocating and working from other states where they have secondary homes and vacation properties, some are finding themselves subject to dual tax for unearned income in some instances where they have spent more than 183 days and perhaps became a statutory resident of another state. Or they’re caught between a state that says, ‘Your income is subject to tax in my state,’ while another state says, ‘Your employer’s business office is located here and you’re subject to tax here.’ OUCH!
Post-pandemic work arrangements appear to have permanently changed at many companies as employees have continued to work remotely either full time or in a “hybrid” arrangement. Hence the workforce has become more mobile and is often working across state lines in neighboring states. Employers are now often hiring workers from all over the country, irrespective of where the office is actually located. But the increased mobility of the workforce comes with a price tag, especially when states are hungry for revenue.
We are advising clients, whether employers or employees, to keep track of the time spent at particular locations because of state nexus rules. It’s up to the employer to manage where their employees are, and we urge employers to have the correct information as to where the employee is going to be working physically so they can register and withhold taxes in that particular state. There are other requirements besides withholding in different states that may apply like licenses and certifications, etc. Workers comp in different states often gets overlooked when hiring remote employees.
Employees need to keep track of the time they spend especially if they work in multiple states, and then apportion their income properly between the states, especially if one has income tax and one doesn’t. If you limit the tax that you pay, you’ll get a larger refund.
At the beginning of the pandemic, there were a number of states that tried to offer some leniency and exceptions — as long as you’re withholding the same way you were before, we’re fine. And some states were not so gracious. Some states are actually now “wooing” remote workers.
The Supreme Court declined last June to take up a case in which New Hampshire sued Massachusetts for continuing to tax New Hampshire residents who worked remotely from home, instead of in their pre-pandemic offices in Massachusetts.
Federal legislation, the Remote and Mobile Worker Relief Act, was introduced in Congress in 2020, and received support from the American Institute of CPAs, but ultimately never passed in Congress. In the meantime, more states are trying to claim income taxes from people who work across state lines due to financial issues and distress incurred during the pandemic.
States are taking a harder look now that some of the pandemic relief has expired: where the services are located, where the worker is, where the base of operations is and where the employer is directing and controlling the work.
States are more closely scrutinizing whether taxpayers have, in fact, relocated. New York State is legendary when it comes to residency tests especially for high-income individuals and business owners who have been trying to reestablish nexus elsewhere. Did you get a new driver’s license, change your address and register to vote? Did you sell your house, find a new place to worship, join the gym? Auditors are rumored to now be checking folks’ Facebook pages!
Also, be careful about states like New Jersey that have changed. If there were employees that were working remotely in New Jersey, they weren’t creating nexus during COVID, but now they are. It’s important for an employer to make sure that if employees are creating nexus, to prepare for the consequences like income tax as well as payroll taxes.
This tax season we had questions from many clients about where they needed to file their tax return if they worked for a company that’s in a different state from where they currently live. Every state has different rules, so a taxpayer may need to file a tax return in both states — the state they worked in and the state they live in — unless they’re not subject to an income tax obligation under the respective state. Generally, when the tax relates to wages, there’s often a tax credit that you could get from your primary residence state. There are de minimis rules that many states have, so if your income is under a certain dollar or time spent in the state threshold, if these thresholds are not met, you may not have a filing responsibility in the second state.
States like New York have so-called “convenience of the employer” rules that need to be taken into consideration. The convenience is that the employer actually has a business reason like being near a major customer or supplier that requires the worker to be in another state. Then the employee is not subject to tax in the state where the employer is located.
It’s important to understand how the convenience rules may affect you. If the employee is working remotely for their own convenience, say because of COVID, and they decided to live or work from a different location than where they were normally working, then they will be subject to tax in the employer’s home state. This is mostly relevant where the tax rates are substantially different. If your employer is located in a high-tax state and an employee is living in and working from a lower-tax state, this could become important to them. The bottom line is that a worker needs to be working remotely for the convenience of the employer and not themselves.
Lucky taxpayers may avoid tax filing requirements if the neighboring states where they’re living and working have a reciprocity agreement in place that would relieve the obligation to pay tax on wages or salaries earned in their non-resident state. New Jersey and Pennsylvania have such agreements for the earnings of employees. For example, if you live in New Jersey and work in Pennsylvania, the company in Pennsylvania is going to have the New Jersey withholding taken out of your pay, so you won’t have to pay taxes in Pennsylvania and then request a credit from New Jersey.
Dual tax issues on unearned income, such as interest and dividends, can be avoided if a person is careful not to be deemed a statutory resident of another state. This would be triggered when the taxpayer is present in another state for either work or personal purposes for over 183 days. This varies by state. For example: If somebody lives in New Jersey and they go and stay in Connecticut for more than half of a year, they’re going to be a statutory resident of Connecticut and a domicile resident of New Jersey, and their unearned income is going to be subject to dual taxation. Usually you’ll get tax credits from your primary state for wage income. The key is for taxpayers to keep detailed records to substantiate their tax position. Maintain records for the days of presence test to demonstrate that it was not met in another state, and if the criteria is met, be careful to file returns in both states so you are not subject to penalties later.
Clients will need to work with their TFG tax professionals to help them deal with complex cross-state tax issues that could subject them to stiff penalties and back taxes. A taxpayer always has to carefully consider what states they have filing obligations in, be it an individual or a business, and make certain they’re timely filing accurate income tax returns, filing extensions timely, making estimated tax payments due timely in order to avoid significant and unnecessary penalties and interest.
The statute of limitations is never running for a tax return or a form filing that was required and was not filed. Should another state come along and assert a claim the taxpayer has a filing responsibility for a prior year not filed, you can find yourself in a position of owing taxes, penalties and interest to the second state, and it will be too late to claim a refund from your resident state.
REACH OUT TO US: The rules can be quite complicated and vary significantly from state to state. Some states are allowing employers to avoid penalties if they can show reasonable cause. We highly recommend that any taxpayer that’s living and working and/or whose offices are located in a different state consult our tax professionals. There can be significant penalties for not filing and paying taxes in a state where they have an obligation. Email your questions to CPA@fuoco.com or call toll free 855-542-7537.
