As we pass a full year since the pandemic’s arrival in the US, remote working has become a mainstay for corporate employees. A Gallup poll in April 2020 indicated that 51% of employees were entirely remote—a number that’s held relatively steady since. It’s now business as usual for our coworkers to be a few states away rather than just down the hall.
However, while this flexibility can be safer and more comfortable for many employees, remote work also can bring potential tax filing headaches for workers who took advantage of location options and headed to another state. If you worked from a state other than your primary residence state for more than 183 days in 2020, you might have sparked dual residence status in those two states—making your income subject to taxation by both. Even if dual residency status was not activated, you still may face paperwork and compliance hassles when you file your return.
Here are four key points to address if you spent time working in multiple states during 2020:
The vacation home dilemma
Working from a vacation home can trigger taxes in multiple states. If a New York tax resident works from her Maine vacation home for a total of seven months during the pandemic, effectively crossing the 183-day threshold, both New York and Maine view her as a resident in each state. The result is double taxation, in which each state will impose a tax on all 12 months of her income for 2020.
Even if the remote worker did not cross the threshold of working for 183 days in the second state, double taxation is possible for whatever portion of time the worker was present in the state—depending on the state. For example, if the same New York resident instead worked from a Colorado home for only three months in 2020, New York would tax her income for all 12 months, while Colorado also would tax three months’ worth of income for the time she spent working there.
The parent trap
If you moved home to live with your parents but kept your residence in your home state, you could incur double taxation. While staying with your parents may have seemed like a better location to work than from home, it still can prompt residency in that state on top of your primary state residency. For example, suppose a young professional living in Connecticut stayed with his parents in South Carolina for 10 months during the pandemic.
If he still maintains his apartment in Connecticut, he is considered a resident of Connecticut. That opens the possibility of double taxation should South Carolina tax part or all of his income for the year. However, if he instead moved out of his apartment in Connecticut, he may be able to file as a part-year resident there and reduce the potential for double taxation.
The pandemic hero tax
Health care providers who answered the call to help in hot spots may be subject to tax in both their primary residence state and the state to which they traveled. For temporary disaster-relief workers, the rules vary by state. Many states tax individuals for performing any services in a state where they are not a resident, while other resident states may provide a credit for taxes paid to a nonresident state. Still others consider disaster-relief workers exempt, and it certainly would seem so in this very particular case of the pandemic. But the law is the law—subject potentially to any changes states may decide to legislate to remove this burden from relief workers.
As of now, if a nurse who lives in Ohio traveled to New York to work for six weeks last spring, New York will tax the nurse based on the total days worked in the state. But subject to limitations, the nurse can take a credit for those New York taxes on his or her Ohio return.
The COE rule
Beware: The convenience of the employer (COE) rule could take you by surprise. Six states implemented this rule before the pandemic, and it has become incredibly pertinent to the much larger-than-usual number of people working remotely last year. Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania all institute a COE test.
To date, the most assertive state enforcing the COE rule has been New York. A cautionary example for the unwary: Take the case of a New Jersey resident who worked from her employer’s New York City office pre-pandemic but was forced to work from her New Jersey home during the pandemic. The state of New York will likely assert the COE rule in this type of case and tax the wages earned as New York wages, ignoring the fact that the employee was forced to work from home in New Jersey due to the health crisis.
Because state rules can vary greatly and do not follow a practical or uniform approach, these issues do not offer one-size-fits-all solutions. For many, these rules will come as a surprise—something they never had to consider before the pandemic. The potential for surprise and higher tax payments seems particularly cruel given the other challenges we’ve dealt with for the past year. But for all these reasons—and the chance that there may be rule shifts during this tax season—a certified tax professional is the individual best equipped to provide guidance in sorting out your particular situation and providing support.
Martin Fiore is the US-East Region Tax Managing Partner at EY.
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