tax tips — November 15, 2021

State Taxes for Remote Work—Who Do I Pay Taxes To, Anyway?

by Susannah McQuitty

state taxes graphic

Remote work has been soaring in popularity since the pandemic forced many workers home early last year. The trend is sweeping the nation—but as geographical lines blur, state lines have become more important than ever.

If your remote work crosses state lines, determining how much income tax to pay which state can be challenging.

I’m going to do you a favor up front—if you remember nothing else from this blog post, remember to check each state’s policies on residence and the Convenience of Employer rule. We’ll go into more detail on both so you know what to look for, but brushing up on the policies of the states you deal with is going to be crucial.

Without further ado, let’s walk through what you need to know about state taxes and remote work.

I work remotely for a company in a different state—do I owe that state income taxes?

Here’s Big Rule #1: Any state that can claim you as a resident gets to tax your income.

Naturally, your home state (also known as your domicile) is a given. Since you live there and consider it home, you’ll pay taxes to that state. That said, your employer state may be able to claim you as a resident too. We’ll look into that in a moment.

Big Rule #2: Any state that uses the Convenience of Employer rule can tax your income, even if you aren’t considered a resident of that state.

Only a few states have this rule, but we’ll come back to Convenience of Employer in a moment. For now, let’s look at how a state you don’t live in could see you as a resident.

How could my company’s state claim me as a resident if I don’t live there?

Different states have different definitions of residency, so if you’re considered a resident by a state that isn’t “home,” you’re called a statutory resident. That’s a fancy way of saying “on paper, you’re a resident.”

Some statutory residents simply moved from one state to the other during the year. They usually pay taxes based on the months lived in each state (e.g., three months of taxes to the first state, nine months to the second).

For other taxpayers, just working a full-time job for a company could count towards being a statutory resident of that company’s state.

Statutory residents can find themselves in a real bind. Since any state claiming them as a resident gets to tax their income, they could get taxed multiple times on the same income.

There’s hope, though. If you find yourself in this position, you can lower the odds of your employer’s state being able to claim you as a resident by examining the its definition of residency and distancing yourself from any qualifiers.

For example, if your employer state considers you a statutory resident if you spend more than half the year there, count days to make sure you don’t cross that line.

The crucial move on your part is to check the residency rules. Once you know what they’re looking for, you’ll be able to strategize ways to prove you aren’t a resident.

One quick note: Sometimes, a state will interchangeably use “part-year resident” and “statutory resident.” Just another reason to examine the language and rules for each state.

If my employer’s state uses the Convenience of Employer rule, will I owe income taxes in that state?

Probably—but first, let’s explain the rule.

The Convenience of Employer rule essentially says that any income you earn for a company will be taxed in the employer state, regardless of your residency status.

In plain English, both your resident and employer states will tax your income.

There’s a loophole, though. If you must work from home to keep your job, your employer state can’t tax you. That said, it takes a lot to prove that you have to work from home, and an impossible commute does not count.

Thankfully, only a handful of states—Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania—use the Convenience of Employer rule to at least some degree.

My company has been withholding taxes for the wrong state. Will I get that money back, or will they send it to the correct state?

If your employer state can’t claim you through residency or the Convenience of Employer rule, you won’t owe taxes to that state. If you did live in the state for part of the year, you’d likely only owe taxes for the months you were a resident.

However, getting the withheld money to the correct state is not as simple as your employer saying, “whoops, I’ve been withholding taxes for the wrong place—lemme just send that over.”

First, you’ll have to file a tax return for both states. For your employer state, you’ll file a nonresident or part-year resident return (whichever best fits your situation according to the state’s rules).

Once you do, either your employer state will send you a refund for the taxes withheld, or the states will settle up with each other—in that case, your resident state will give you a tax credit for the withheld amount.

My employer hasn’t been withholding any taxes from my paychecks at all—do I still have to file a state return for my employer’s state?

In this case, your resident state and employer’s state probably have a deal between them called a reciprocity agreement. Reciprocity means that your employer doesn’t have to withhold anything for state taxes, and all you have to do is file a state return for your resident state.

That said, you should check and make sure your resident state and your employer’s states have a reciprocity agreement. If not, your employer may have dropped the ball. You are still responsible for filing correctly, though, so you should check the residency rules for your employer’s state to make sure you aren’t required to file a tax return there.

To play it safe, consider filing a tax return for any state you’re not sure about.

Filing multiple state returns gets expensive quickly. How can I save money while staying on top of my state taxes?

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