Smart Tax Planning

Here are the key tax issues you need to know if you will be working remotely permanently

Key Points
  • Six out of 10 workers said their work-life balance has improved since they no longer commute to the office, according to a survey by recruiting agency Robert Half.
  • Remote work raises the question of whether an individual or a business has established a tax presence in a different state.
  • If you establish a presence in a different state, it could come with additional tax reporting obligations. However, some states have reciprocity agreements with other nearby jurisdictions.
Maskot

If you'd like to make your kitchen or your beach house into your permanent office, think about what it might mean for your taxes.

Social distancing orders in light of the coronavirus pandemic has forced companies to send workers home and have them work remotely.

The trend might continue.

Indeed, 3 out of 4 chief finance officers and finance leaders are considering moving at least 5% of their on-site workforce to remote positions permanently after the pandemic, according to Gartner's survey of 317 finance executives on March 30.  

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Depending on where your remote office will be based, there could be additional tax burdens in store for you and your employer.

There's even greater complexity for individuals who might reside in one state but flee to another location – say, a relative's residence or to a second home -- to work remotely during the pandemic.

"There are some states where as soon as you start working there, you'll owe money," said Eileen Sherr, CPA and senior manager for tax policy and advocacy at the American Institute of CPAs. "Those states will make you file a non-resident return and have withholding."

Tax nexus

Laurence Dutton

Tax presence or nexus, as it's known in accounting circles, is at the heart of determining how states levy companies and workers.

For companies, there are three factors that determine nexus: property, payroll and sales, Sherr said.

So, telecommuting employees – the payroll element -- based in a different state could give an employer presence there, she said. This could subject the company to state payroll tax registration requirements and corporate income tax obligations there.

For employees, that could mean they're subject to tax withholding in the state where they're working remotely, as well as potential non-resident income tax return filings, Sherr said.

This will depend on the state they're in and whether they meet thresholds based on income generated or time spent there.

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Generally, you pay taxes based on where you work or earn income.

More than two states can be involved in the mix, as well. Consider that Covid-19 has spurred some workers to flee across the country to be with relatives.

"It's one thing if someone who normally works in New York is now working out of New Jersey because they're working from home," said Jared Walczak, director of state tax policy at the Tax Foundation "But that employee might say, 'I need to go to Arizona to be with family.'"

"It introduces this random tax element," he said.

Multi-state agreements

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Some states have pacts with other jurisdictions in the area to minimize duplicative taxes and non-resident returns for cross-border workers.

For instance, New Jersey and Pennsylvania have a reciprocal personal income tax agreement, which means Garden State residents working in Pennsylvania won't face the Keystone State's income taxes. Similar agreements are in place among other mid-Atlantic states and a few jurisdictions in the Midwest.

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Other states may grant an income tax credit to residents who work elsewhere.

"Maybe you worked in New York, but now you work from home in Connecticut for five months," Walczak said.

"Connecticut will provide you with a credit for taxes paid to New York, but the credit is limited to what Connecticut taxes you on income," he said.

Working while away

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If you're planning to work remotely on a long-term basis, understand how the state you're working from will treat the income.

If you wind up heading to a different state altogether to wait out the pandemic, find out how long you can be there before you're subject to tax reporting requirements.

 "Different states have different tax treatments," said Sherr. "Your income tax liability may change based on the state you're in for work purposes."