Clients who work remotely face a new landscape of potential double taxation, as states differ in how aggressively they levy income tax on remote and cross-border workers.
“That each state [often] adopts its laws without regard for other states’ laws for the same type of tax makes complying extremely difficult, and expensive,” said Joseph F. Bigane III, a CPA at JFB Tax Consulting in Downers Grove, Ill.
With more companies adopting “work-from-anywhere” policies in the post-COVID world, “states are going after both business and individual taxpayers,” added Justin Shelman, a CPA and partner at NDH in Chicago.
For individual taxpayers, many states have minimum requirements for the number of days working in that state to ignite tax obligations. “Many taxpayers are surprised to learn that spending just one day in another state can trigger a filing obligation even if they have no wages sourced to another state,” Shelman said.
Delaware, Nebraska, New Jersey, New York, and Pennsylvania are also “convenience of employer” states: Employees are taxed if their employer is in one of those states unless the employer requires the work to be performed out of state. Last year, the Alabama Tax Tribunal ruled that a former state resident who’d moved to Idaho still had to pay Alabama income taxes as his employment with an Alabama company constituted “transacting business in Alabama,” potentially moving that state closer to a “convenience of employer” rule.
Connecticut also has such a rule but only applies it in retaliation against other states with similar rules.
Kris Yamano, a partner at Crewe Advisors in Salt Lake City, said that states may only appear to have generally become fiercer about income taxes in the age of remote workers. “Some states may offer tax credits for state taxes paid to other states to try to alleviate potential double tax,” she said.
About a third of the states have a reciprocity agreement with other states (in many instances, contiguous ones), meaning your client could work and live in neighboring states without getting hit with double income tax or even a need to file in more than their home state.
States with reciprocity agreements often spar with contiguous “convenience” states. Ever since the pandemic ignited widespread work from home, for instance, Connecticut and New Jersey have insisted that their resident citizens who work remotely for companies in the “convenience of the employer” state of New York should pay income tax to them and not to New York.
Connecticut and New Jersey credit their residents for taxes paid to New York and have leveled a convenience rule of their own at New York, meaning they can tax the income of that state’s residents who work for Connecticut or New Jersey businesses.
The wealthier the client, the more important for advisors to learn where they’ve worked.
“State income tax planning is important for many ultra-high-net-worth clients, including making sure [the] proper tax residency/domicile has been established,” said John Pantekidis, managing partner and general counsel at wealth advisory firm TwinFocus in Boston.
Still, other states want to make taxes easier for remote workers, with time usually a factor in calculating tax liability. Indiana and Montana are among the latest to generally allow employers to not withhold state income tax for an employee in the state for 30 days or fewer during the taxable year. Minnesota is considering a similar statute. Kansas also has a committee bill that would clarify tax withholding for residents who work in multiple states.
Most states now define revenue derived from providing services as being earned in the state where the customer receives the service. “Some states have ‘floors,’ so if the service revenue does not exceed a minimum dollar amount, the income tax laws don’t apply,” Bigane said. “Other states obligate the filing of an income tax return after dollar one of service revenue.”
“In most cases, a business trip to another state will not result in taxes due in that state,” added Larry Pon, a CPA in Redwood City, Calif., but “a temporary assignment in another state could cause that income to be taxable in that state. In most cases, the payroll department will allocate that income for that period in that state and withhold taxes in that state.
“Review paystubs,” Pon said. “This could mean filing non-resident tax returns for those other states.”