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Working from home — or any location away from the office — can come with some benefits. A simplified tax situation may not be one of them.
If you worked remotely in 2021, it’s worth making sure you understand your state tax obligations this tax-filing season. Depending on various factors that include your state of residence, how long you worked where you did and, possibly, where your company is located, you may need to file more than one state tax return.
“If you spent a significant time working out of another state in the last year, you very likely will have an income tax liability there,” said Jared Walczak, vice president of state projects for the Tax Foundation.
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It can be complicated. Different states have different approaches for when they expect you to tell them about income you earned while there.
For example, some states let nonresidents work within their borders for at least 30 days without a withholding requirement. Other states’ thresholds kick in faster, including 23 that expect you to pay taxes from day one of working there. And still others have a wage-based threshold for taxation, while nine states have no income tax at all.
Be aware that your state of residence generally has the right to tax your income, no matter where it was earned. The bigger question is whether another state has the authority to, as well.
Most states offer a tax credit that counts against what you owe to the nonresident jurisdiction where you worked and owe taxes. However, the credit may not fully eliminate the amount paid to the second state if its tax rate is higher than where you live.
“Sometimes the tax credits help, but sometimes they do not,” said April Walker, lead manager for tax practice & ethics with the American Institute of CPAs. “They are not a dollar-for-dollar offset.”
Meanwhile, some states — 16 of them, according to the institute — have reciprocal agreements with one another. Basically, if your resident state has this pact with the one where you work, you won’t have to pay in both jurisdictions.
Sometimes the tax credits help, but sometimes they do not.
April Walker
Lead manager for tax practice & ethics with the American Institute of CPAs
For instance, if you live in Maryland but work in the District of Columbia, you only need to worry about having taxes withheld for Maryland and filing a tax return there.
There also are a handful of states — Connecticut, Delaware, Nebraska, New York and Pennsylvania — that impose a “convenience of employer” test for remote workers. If your company is located in one of those states, you generally will pay taxes there (whether you ever physically step foot in it or not) unless your remote location is required by your employer.
Also, if you are an independent contractor for your company — you do not receive a W-2, but rather, say, a Form 1099-NEC — you are considered self-employed and taxed as such. This means you’re responsible for determining which states you owe taxes to, based on factors that include where you reside, where you were when you earned the money and the amount earned.
Regardless of your employment situation, it’s worth consulting with a tax advisor if you think you may need to file a return in multiple states.
There’s a chance that the taxation of remote workers could change at some point, given the pandemic-spurred growth of the nation’s mobile workforce (45% of full-time employees were working partly or fully remotely in September, according to a Gallup poll).
A bipartisan bill in the Senate, the Remote and Mobile Worker Relief Act of 2021, would prohibit states from taxing or requiring withholding for non-resident employees who are in a state for less than 30 days. A similar measure is pending in the House.
Another Senate bill (with a related one in the House) would limit the ability of states to impose the “convenience of employer” rule on nonresidents. All of these measures have been idling in Congress since early 2021, however.
Also, although some states may have modified or eased their rules earlier in the pandemic, you shouldn’t count on that persisting, Walker said. And, it’s quite possible that states will step up their enforcement efforts.
“As a taxpayer, you can’t just assume the state isn’t going to go after you,” she said.
