Tax reporting issues for remote workers

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Telecommuters should “carefully consider which states they have tax filing obligations in, ensuring they timely file accurate tax returns, file extensions, and make any payments or estimates due” to ensure that unnecessary penalties and interest are not incurred, advised Robbin E Caruso, CPA, partner and co-head of the national tax controversy practice at accounting and consulting firm Prager Metis in Cranbury, NJ

Caruso digs deeper into remote work and tax issues in a Q&A with
SHRM online.

What are the tax implications when an employee has worked in two states during the year?

Carus: The only way for taxpayers to ensure that they are not subject to income tax in more than one state is to avoid meeting the legal standard of who would be considered a “taxpayer” under respective state tax laws. Some states require the filing of a non-resident tax return with as little as $1 earned in that state.

Some taxpayers may avoid a reporting obligation if the neighboring states where they live and work have entered into a reciprocal agreement that exempts them from the obligation to pay taxes on wages or salaries earned in the non-resident state – New Jersey and Pennsylvania, for example, have such agreements. Instead, income taxes are withheld and paid to their resident state.

Taxpayers moving to a new state should plan carefully, making sure to establish residency or “domicile” in their new home state and making sure they have severed all tax ties with their State of origin. During the year of the move, they will typically have tax filing obligations for part of the year in each of the states in which they lived.

Where do workers file their tax return if their employer is located in another state?

Carus: As a general rule, all of a person’s taxable income will be reportable in their home state, where they have established their domicile. Domicile determinations typically consider factors such as where their primary residence is, where their driver’s license is held, where they are registered to vote, where their doctors and religious affiliations are located, where their children go at school, where their dearest possessions are kept and even where their “heart” is.

In addition, earnings may also be reported and taxed in the state where the work was performed or where the employer is located, depending on specific state tax laws. Some states have
de minimis so that, for example, the income is not subject to tax when a certain monetary or temporal threshold is not reached.

Keep in mind that some states do not tax personal income at all, such as Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Since the rules are quite complicated and vary widely from state to state, it is strongly recommended that any taxpayer whose income is derived from another state, or who lives, works, or whose office is in a another state, to consult an experienced tax professional. in such matters. There can be significant penalties for not filing and paying taxes in a state where a duty exists.

Will teleworkers get a tax credit for the taxes they pay to the state where their employer is based?

Carus: Most states provide a tax credit to residents taxpayers who are liable to pay tax on their income in another State, provided that the income is also subject to tax in their State of residence. The resident tax credit is also generally limited to the amount of tax the resident state would assess on the same taxable income.

We have seen states verify (i.e. audit) resident tax credits to ensure that a taxpayer has not offset their resident tax with a credit for taxes they have paid to another state in cases where the income was not actually subject to resident state income tax.

Multistate tax returns are generally complicated to prepare, and taxpayers should ideally seek the assistance of an experienced tax professional or carefully research tax credit laws and review form instructions, which can be found at the website of the tax or revenue department of their state of residence.

What is the “convenience rule” and what does it mean for remote workers?

Carus: There are several states, such as New York, that have employer convenience rules where a taxpayer works at a remote location in another state at the “convenience” of the employer. Simply put, “convenience” is that the employer has a business objective, such as proximity to a major customer or supplier, that requires the employee to work remotely in the other state.

In this case, the employee is not subject to tax in the state where the employer is located with respect to such earnings. Also, if the employer has an office in the state where the taxpayer works, they will generally not have to file a return in the state of the employer’s tax domicile, which is considered the location of the head office. of the company or the place of major decision-making. functions take place.

It is important that workers understand how these rules may affect them. If the employee is working remotely for their
own convenience, they will be subject to tax in the taxing State of the domicile of the employer.

Related SHRM articles:

At home and away: working across borders,
SHRM onlineFebruary 2022

Out-of-state remote workers increase legal risks for employers,
SHRM onlineJanuary 2022

Ask HR: Where do remote employees pay their taxes?,
SHRM onlineJanuary 2022

Out-of-state remote work creates tax headaches for employers,
SHRM onlineJune 2020

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