Many people are reluctant to return to the office, enjoying the freedom and ease of working remotely.
However, depending on where you’re working and why you’re out of the office, this could cost you double — as in double taxation and double filings – come April 18.
During the pandemic, many Americans moved out of cramped, crowded cities to areas with more space or to be closer to their “bubble” of family and friends, even if it was to a different state. States in turn offered temporary waivers, so most employees didn’t have to pay income tax both in the actual state where they were working and the state where the work was being done pre-pandemic.
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But that’s changed now. Those waivers have mostly expired, which means if you’re still working remotely in a different state, you should check state tax laws.
Depending on where you’re working, where your office is based, and why you’re still working remotely, your taxes could get messy. And in some instances, you could be required to pay taxes to two states.
“Several states still have rules that tax the income of employees in offices… regardless of whether they’re there or not,” said Jared Walczak, vice president of State Projects at The Tax Foundation think tank.
How do state and local taxes usually work?
Generally, state and local income taxes should be withheld where the employee performed the services. That’s simple when employees and employers are in one place.
It’s more complicated when they are in two different states. Some states offer reciprocity, which allows taxpayers to only pay in the state where they’re living and working. Employers would only withhold taxes where the employee resides, and the employee files that state’s tax return.
If there isn’t reciprocity between the two states, some states allow you to get a credit for taxes paid in the state where you’re not living and working. To get the credit, you’d have to file an income tax in both states. That means filing a resident state income tax form for your home state with all your income sources and a nonresident tax return with only your employment income.
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- If the tax rate in the state where you will receive a credit is lower than your home state, you may still owe some residual tax.
- Receiving the credit also assumes residency, which can also be tricky, warns Nathan Hagerman, partner at Taft law firm. Typically, it’s spending more than half a year in the state with the intent of making it your permanent home, such as getting your mail, driver’s license or voting or buying a home there.
- Credits don’t apply to local and county taxes.
In a handful of states that offer neither reciprocity nor credit, you may end up owing tax in both the state where you’re living and working and also in the state where your employer is.
Which states do people have to watch out for?
In Connecticut, Delaware, Nebraska, New York and Pennsylvania, employers withhold income tax based on where the employer is located unless the company requires the worker to telecommute.
So, if employees choose to work from a different location out of convenience, not requirement, those states will tax the employee’s income no matter if they’re working and living in a different state and already paying income tax there.
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What if I split my time between states?
Split time can complicate taxes further because states vary in how many days a nonresident employee can work in a nonresident state before withholding is required.
More than half of the states that have a personal income tax require employers to withhold tax from a nonresident employee’s wages beginning with the first day the nonresident employee travels to the state for business purposes, but other states allow you to work there for 30 days or more first, according to the Mobile Workforce Coalition, a group of 280 organizations to advocate for simplifying nonresident state income tax rules.
In an extreme example, professional athletes must keep track of their practice and games in different states because they’re required to pay income tax in each state where they earn income. This holds true, too, for lawyers, consultants and construction workers who may go to a different state for months for a job.
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What’s the bottom line for remote workers and taxes?
Check state tax laws and keep your employer informed of your whereabouts so they can make proper withholdings.
“States have become aggressive, especially on the coasts, seeking to tax employees who aren’t present in their state,” Hagerman said.
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Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at email@example.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
Story Credit: usatoday.com