The following is from an Ayco’s Insights article published on August 13, 2020.
Whether you’re working from home out of choice—or perhaps out of necessity due to the pandemic—you may face some unanticipated tax consequences as a telecommuter. That’s especially true if you live in a state that’s different from where your employer is located.
We’ve highlighted several scenarios that might apply to you, and provided some guidance. Even if you don’t live or work in the locations mentioned, it’s possible your tax situation could be similar based on applicable laws.
The information provided isn’t meant to be comprehensive – so be sure to contact your financial advisor for more details.
You’re working from your second home which is located in a different state than you reside. Do you need to report your work-from-home (WFH) compensation to that state?
Yes, you will need to report income if that state taxes non-residents on any compensation earned (including WFH income) within its borders. Keep in mind, you’ll also be taxed by your home state on those WFH wages.
But, you might be able to receive a tax credit from your home state to alleviate the double taxation. You may need to pay estimated taxes to the non-resident state.
You’re telecommuting frequently from your second home, but you’re not a resident of that state. Could you be considered a statutory resident?
Yes, it’s possible. Each state has its own statutory resident standards. You should be aware of the criteria used by the state, and record the number of working and non-working days spent there. Make sure to be accurate because state auditors may monitor your activity through your cell phone or credit card records.
You typically work in Manhattan. But you live in another state and have been strictly working from home during the COVID-19 crisis. Should you make estimated payments or switch withholding to your home state?
In regards to estimated payments, all your income will be taxed by your resident state. But, New York State (NYS) has a “convenience of the employer” rule which gives it the authority to tax the wages of non-resident employees, like yourself, for work-related services they perform at their home office. However, you may be able to receive a credit from your home state for the WFH taxes paid to NYS, which may negate the need to make estimated payments to your resident state.
Either way, you should continue to have your employer withhold to NYS, unless you plan on contesting the applicability of the state’s convenience of the employer rule to your situation.
You primarily work in NYS, but don’t live there. You’ve been telecommuting from your home in a different state during the pandemic. Will NYS still tax you for those days?
It’s likely NYS will tax you based on the state’s convenience of the employer rule which permits NYS to tax all your work-related income in a calendar year, regardless of your location. This even applies to income such as bonuses or equity compensation generated in 2020 but received in 2021.
You work and live in one state. However, you have a second home in another and occasionally telecommute from there (but not enough to be considered a statutory resident). Should you be concerned about any tax implications from the second state?
Yes. You’ll typically face the normal home-state taxation on all your income. But, the second state may also tax you on any WFH days spent within its borders. While some resident states provide you with a tax credit to avoid this double-taxation scenario, not all do.
You live in Connecticut and usually work in Manhattan. During the health crisis, you’ve been working from home. Are there any tax implications to consider?
Yes. Connecticut will continue to tax all your work income as normal. Additionally, NYS will tax any telecommuting days performed in Connecticut. However, you should be able to receive a credit from Connecticut for the WFH taxes paid to NYS.
You've been telecommuting from your second home in another state and decide you want to move there. How much time do you need to spend in that state to be considered a resident and only have to pay taxes to your new state?
You must establish a physical presence in the state and show you have intent to be domiciled in the new state and don’t intend to move back to your former state.
Your domicile isn’t something that can be flip-flopped on a yearly or monthly basis. You have to build your case during the year you moved — as well as in subsequent years— to persuade the taxing authorities (and possibly courts) about the permanency of your move.
So, simply moving your living quarters to a different state won’t change your domicile to that state without providing clear evidence about the second state becoming your permanent home. State taxing authorities and courts look at a number of objective factors when determining whether this intent has been established.
Also, keep in mind you may still need to pay income tax on your WFH earnings to your former state, if that state has a convenience of the employer rule.
As you can see, tax laws vary widely from location to location. Congress is considering legislation that would provide relief for telecommuting employees by making these rules more consistent and limiting how states tax remote workers. However, such legislation has been proposed numerous times before without becoming law.
The Ayco Company, L.P. is a Goldman Sachs Company, which is an affiliate of The Goldman Sachs Group, Inc. Marcus by Goldman Sachs® is a brand of Goldman Sachs Bank USA, which is an affiliate of The Goldman Sachs Group, Inc.