Telecommuting continues to entice both employers and employees, especially post-COVID. A hybrid work schedule that allows employees to work remotely a few days a week generally increases job satisfaction and improves work-life balance: a win-win for employers and employees. Advances in digital technology have made it easier for more employees to telecommute, which lessens the limitations imposed by the geography of where you live.
While telecommuting technology has opened up a world of opportunity, it can also create complex state tax implications. As an employee, it is important to understand those implications to avoid surprises at tax time and to avoid unexpected taxes, penalties and interest.
Remote Work and State Tax Law
Generally, you are subject to tax in the state where you are domiciled. Your domicile is your primary home: the place where you live and spend most of your time. When you think of your domicile, it is generally going to be the state where you are registered to vote, where your primary residence is located, where you have your driver’s license, where your doctors and dentist are located, and the address you use for mailing, banking, and investment purposes. If your state has an income tax, all of your income is taxable in your state of residence to the extent the state taxes it. Straightforward, right? Sure, but it can get complicated when you reside in one state and work in another, work remotely for an employer located in another state, or split your time between two or more states. Unfortunately, every state has their own rules on how they tax nonresidents. What applies in one state may not be applicable in another state.
So, what factors impact a state’s ability to tax a nonresident individual? To be subject to tax in another state, generally, there has to be nexus or some defined minimum connection with the state that allows them to tax you. It could be having a home in the state, working or performing services in the state, or working for an employer located in the state.
What Is “Convenience of the Employer”?
When it comes to telecommuting, determining if you are subject to a state’s tax could hinge on whether the state uses a “convenience of the employer” rule. For states using this rule, it means that if you work remotely by choice rather than by the necessity of your employer, your wages are potentially subject to tax in your employer’s state. Seven states have a “convenience of the employer” rule: Alabama, Connecticut, Delaware, Nebraska, New Jersey, Oregon, and Pennsylvania. Each of these states enforces its convenience rules differently, so if you work remotely for an employer located in one of these states, you need to understand how the rule applies to your specific circumstances.
The “convenience of the employer” rule can also be impacted by reciprocity agreements. A reciprocity agreement permits residents to live in one state and work in another without being subject to tax in the work state. When a reciprocity agreement is in place, you pay taxes on your earned income only in your state of residence. These agreements are most common between states that border each other but may sometimes encompass states that do not directly border each other. For example, Arizona’s reciprocity agreement covers workers living in California, Indiana, Oregon, and Virginia.
Without a reciprocity agreement, you may be subject to income tax in the state where you work. If you are taxed in your state of residence on all of your income and you are taxed on the wages earned in your work state, you may be wondering if you are subject to double tax, and the answer is generally no. Most states allow residents to claim a credit for taxes paid to other states to avoid double taxation.
JFS Wealth Advisors understands the complexities of multi-state issues. We can help you analyze your situation and develop tax-efficient solutions for both your earned income and your investments. Please let us know how we can help.
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Disclosure: This content is provided for informational and educational purposes only and should not be construed as tax or legal advice. JFS Wealth Advisors is not a CPA firm or Law firm. You should consult with a qualified tax professional regarding your individual situation before making any tax-related decisions.
