Since COVID-19 lockdowns struck last March, companies all over the world have switched to a work-from-home model. Many employees even began working in a state other than the one in which their office is located. Some have since returned to working in offices, but many have not. If you are working in a different state (or country) than your office, you may need to file tax returns in both states or pay income tax in multiple jurisdictions.

In general, states can tax your income whether you are living there or working there. Whether you must include taxable income in a particular jurisdiction depends on several factors, including domicile, nexus, and residency.

In 2015, The Supreme Court ruled that two states cannot tax the same income twice. According to the ruling, states are supposed to offer residents credits on their tax returns for taxes paid to another state, so the taxpayers essentially get that money back.Several states also have agreements in place that allow credits for tax due in another state so that you are not taxed in both states. For example, in metro Washington, DC, payroll tax withholding is based on the state of residency, which allows people to work in another state without causing complicated tax issues. Other states, including Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania, tax workers based on their job location, even if they live in a different state. Accounting Tax Group professionals are certified to complete Federal IRS returns, all 50 State's tax returns, and any local tax obligation filings.

Necessity or Convenience

There's a gray area known as the "convenience rule" that conflicts with this federal decision. The convenience rule states that an employee must pay income tax to their employer's state if they work remotely because it's convenient to do so, not because their employer requires it. This rule can be ignored in many cases during the coronavirus pandemic because companies are requiring employees to work from home. If there is a mandatory government shutdown in effect, then working remotely is a necessity. 

If employees have the option to go back to the office but choose not to because of health concerns, then the state may view it as a convenience. In that case, employees might be liable for double taxation.Workers who have two states' income taxes withheld from their paycheck should receive a tax credit from their resident state for the same amount they paid to their employer's state. The other option is to file a nonresident tax return to get that money back. Either way, employees will have to wait for a tax refund. These rules might come into play more frequently in the future because many businesses have found that having their employees work remotely is more cost-efficient.

Keeping Good Records

Keeping good records is essential for your taxes, especially when there are so many unknowns. Keep track of how many days you worked in each state and how much money was earned. Be specific about the locations you worked in during 2020. Cities and counties levy income taxes, too. It's also important to let your employer know that you've been working from a different state, so you can make sure your state-level withholding is accurate.

Questions? Call Accounting & Tax Group.

Tax laws and personal tax preparation are complex. If you have been working in a different state than your company's office during the pandemic, it's a good idea to consult with a tax and accounting professional. At Accounting & Tax Group, we can help you figure out your tax liability, recommend a course of action to lower your tax bill and make sure you get the right off-setting credits. Call, email, or request an appointment with one of our tax experts today.