With the drastic increase in remote work over the last year, many of your clients may wonder how to handle state taxes, especially if their homes and company offices are in different states. Laws differ from state to state, but in general, here’s what you should know when your clients live and work remotely in one state and their employer is based in another:
The Convenience Rule
State tax laws vary widely, including laws that determine whether a state taxes income based on a taxpayer’s place of residence, place of work, or the location of the employer’s office.
In most cases, taxpayers pay taxes only to the state they were in when they earned their money, but this is by no means a universal rule. The most notable exception is the Convenience of the Employer Rule. Currently, seven states have such a rule in place: Arkansas, Connecticut, Delaware, Massachusetts (temporarily), Nebraska, New York, and Pennsylvania.
These “convenience rule states” tax income based on the location of the employer instead of where the workers reside or work.
Can my remote working clients be double taxed on the same income?
Unfortunately, in some cases, yes. Just as clients who live in one state but work in another often have to pay income taxes to both states, clients who live and work in one state but whose job is in a convenience state may have to pay taxes to both states as well. To offset this double taxation, many states will offer their residents a tax credit equal to the amount of taxes they paid to the state where they earned their money.
But remote work has made these types of tax credits more of a gray area. If your client works from home, their state of residence is entitled to collect income tax on those earnings. But if they work for a state with Convenience of Employer Rule, they may still have to pay taxes to that state too, even if they never set foot there. Some states, like New Jersey, will continue to offer the tax credit to offset state taxes its residents paid to New York due to the convenience rule, even if they earned their income while working from home in New Jersey.
How would temporarily working from home affect my clients’ state taxes?
Changing working conditions during the pandemic and increased flexibility from employers means that many employees may work from home only part of the year. The impact this will have on their state taxes once again depends on the laws of the states they live and work in (and in some cases, where their employers are located.)
In most cases, they’ll pay income taxes to the state they were in when they earned the money. Most states have separate income tax returns for non-residents and partial-year residents. These forms usually include an apportionment schedule, a worksheet that helps them calculate what they owe based on when and where they worked.
While calculating taxes for multiple states may seem overwhelming for your clients, you can simplify the process with your TaxSlayer Pro software. You can easily download and install software for all states that are relevant to your clients and choose the appropriate filing status for each one – Resident, Non-resident, or Part-year Resident. Relevant apportionment schedules are automatically included in all TaxSlayer Pro state software, making it easy to answer clients’ questions and ensure they aren’t paying more than they need to.
The future of remote work and state taxes
With remote work becoming more common, many have suggested the need for changes to state tax laws, especially the convenience rule. The state of New Hampshire filed a suit against Massachusetts for imposing a convenience rule that allowed them to continue taxing remote workers who lived in New Hampshire. Several other states have filed similar briefs with the U.S. Supreme Court. If the Supreme Court rules in favor of New Hampshire, the tax landscape for remote workers could shift dramatically.
We’ll cover any new developments, so be sure to stay up-to-date by subscribing to our newsletter and following the TaxSlayer Pro blog.
This article is up to date for tax year 2021 (returns filed in 2022).