The remote work landscape has added many challenges for workers this tax season and some individuals may face a higher tax bill because of it.
Though some individuals may be required to file two tax returns in two separate states this year, most are unlikely to pay more in taxes just because they are working from home. That’s because workers typically receive a credit on their resident returns for taxes paid on income in other jurisdictions.
There are a handful of states, however, that have what are known as "convenience of the employer" rules, including New York and Connecticut, which means all of an employee’s income is sourced to the employer’s state, regardless of where that employee is physically working.
Each state has different tax treatment, which means some remote workers are at risk of being double-taxed while working from home. Some states may not offer a credit for taxes paid on income earned in convenience of the employer states for the simple reason that the income is actually being earned in the state of residence, leading to the scenario where that income is taxed two times.
For years, for example, Connecticut residents who worked in New York were not receiving credit for taxes paid to the Empire State against their Connecticut income tax liability. So for the days they worked at home in Connecticut, they were paying taxes on that income to both states.
States that provide credits are missing out on that tax revenue.
Currently, five other states besides New York have the convenience rule in place. Those states include Arkansas, Connecticut, Delaware, Pennsylvania and Nebraska. A couple of those states – like Arkansas and Connecticut – recently adopted the measure, indicating that it has been gaining in popularity.
Double taxation has traditionally been faced by athletes and people employed in a few select professions.
But the pandemic situation has brought the tax plight to the forefront of the national discourse in the form of a lawsuit, a ruling on which would have far-reaching implications.
As previously reported by FOX Business, New Hampshire has sued Massachusetts over a temporary convenience of the employer measure imposed by Massachusetts. The order stipulates that if a New Hampshire resident would otherwise be in a Massachusetts office if not for the virus outbreak, that individual would have taxes withheld as though he or she were earning income in the state.
Unlike Massachusetts, New Hampshire does not levy an income tax on wages, which means residents wouldn’t be getting a credit for taxes paid to Massachusetts.
Another scenario where taxpayers could potentially owe more this year, even if given a credit in their state of residence, is if taxes are higher in a nonresident state where they are owed.