Expert Q&A: Resolving Tax-Filing Issues for Remote Workers

Remote workers should "carefully consider in which states they have tax-filing obligations, making certain to timely file accurate income 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-lead of advisory and accounting firm Prager Metis' national tax controversy practice in Cranbury, N.J.

Caruso delved further into issues involving remote work and taxes in a Q&A with SHRM Online.

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

Caruso: The only way for taxpayers to make certain 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 the respective state's tax laws. Some states require the filing of a nonresident income tax return with as little as $1 earned in that state.

Some taxpayers may avoid a filing requirement if the neighboring states where they live and work have a reciprocity agreement in place that relieves them of the obligation to pay taxes on wages or salaries earned in the nonresident state—New Jersey and Pennsylvania, for instance, have such agreements. Instead, income taxes are withheld and paid to their resident state.

Taxpayers that move to a new state should plan carefully, making certain to establish residency or "domicile" in their new home state, and making sure that they have severed all tax ties to their original state. In the year of the move, they will generally have part-year tax return filing obligations to each of the states they lived in.

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

Caruso: Generally, all of a person's taxable income will be reportable in their home state, where they have established domicile. Determinations of domicile commonly consider such factors as where their primary residence is, where their driver's license is held, where they are registered to vote, where their doctors and any religious affiliations are, where their children go to school, where their cherished possessions are kept, and even where their "heart" is.

In addition, income may also be reportable and taxed in the state where the work was performed or where the employer is located, depending on the tax laws of the specific states. Some states have de minimis rules so that, for instance, the income may not be subject to tax where a certain dollar or time threshold is not met.

Keep in mind, certain states don't tax individual income at all. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming.

As the rules are quite complicated and vary significantly from state to state, it is highly recommended that any taxpayer with income sourced to another state, or who is living, working or whose office is in a different state, should consult with an experienced tax professional in such matters. There can be significant penalties for not filing and paying taxes in a state where there is an obligation.

Will remote workers receive a tax credit for taxes they pay to the state where their employer is based?

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

We have seen states verify (i.e., audit) resident tax credits to make certain that a taxpayer has not offset their resident tax liability with a credit for taxes they paid to another state in cases where the income was not actually subject to the resident state's 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 the tax credit laws and review form instructions, which may be found on their resident state's department of tax or revenue website.

What is the "convenience rule," and what does it mean to remote workers?

Caruso: There are several states, such as New York, which have convenience of employer rules in which a taxpayer works in a remote location in another state at the "convenience" of the employer. Simply stated, the "convenience" is that the employer has a business purpose, such as being near 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 the employer is located with respect to these earnings. In addition, if the employer has an office in the state where the taxpayer is working, then they would generally not have to file in the employer's tax home state, which is considered to be the location of the company headquarters or where major decision-making functions take place.

It is important for workers to understand how these rules may impact them. If the employee is working remotely for their own convenience, they will be subject to tax in the employer's home tax state.

Related SHRM Articles:

Home and Away: Working Across Borders, SHRM Online, February 2022

Out-of-State Remote Workers Are Increasing Legal Risks for Employers, SHRM Online, January 2022

Ask HR: Where Do Remote Employees Pay Taxes?, SHRM Online, January 2022

Out-of-State Remote Work Creates Tax Headaches for Employers, SHRM Online, June 2020