The number of Americans working from the comfort of their own home soared during the COVID-19 pandemic.
However, the rise of remote work comes with a potentially painful ramification for many employees during the tax-filing season. Depending on where you live and where your employer is based, you may be subject to the income tax rules of two – or more – states.
Individuals can be taxed based on both where they live, and where they earn income. As of 2024, all but nine states impose a tax on income.
When a person lives in one state but works in another, they may have tax liability in both states. However, they will typically receive a tax credit to eliminate double taxation of their income.
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However, there are five states that tax people where their office is located – even if that person does not physically work in the state. These individuals may be denied a tax credit in their home states, meaning they may be forced to pay income taxes in two different states.
“Many remote workers will face tax liability in multiple states. For most, this will not result in genuine taxation because they will receive a credit in their home state against liability they incur in other states,” Jared Walczak, vice president of state projects at the Tax Foundation, told FOX Business. “But some are unfortunate enough to work for companies based out of states that have what’s called a convenience rule, which can result in two states taxing the same income without any adjustment.”
So-called convenience of the employer rules allows states to impose income tax on employees, even if they are working remotely in other states if they are employed by a company that is headquartered within their borders. Unless employees live and work in a state with no income tax, they may be taxed twice.
Connecticut, Delaware, Nebraska, New York and Pennsylvania all have convenience of the employer rules in place, although the specifics may differ slightly from state to state.
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“New York is the most aggressive here, although they aren’t alone,” Walczak said. “New York would say if you work for a New York-based company and you’re not assigned to a non-New York office, then you owe New York income taxes on all the income that you earned through that company. The problem is you might work in another state, and from that state’s perspective, you clearly worked there as well as lived there, so they’re not giving you a credit for New York taxes.”
There are some exceptions to the rules.
A number of states have reciprocity agreements in place that allow neighboring states to tax cross-border workers entirely based on residency – avoiding the complexities of filing, or paying, in two states.
There are 30 reciprocal agreements across 16 states and the District of Columbia, according to the Tax Foundation.
For example, if you live in Maryland but work over the border in Pennsylvania, you would not pay Pennsylvania taxes or file a tax return in that state. You would only have to pay Maryland taxes and file a return in the state in which you reside.
There are also reciprocity agreements in place between states with convenience of the employer rules. That means if you live in Pennsylvania but work for a New York-based company, you would only pay one set of taxes.
If there is not a reciprocity agreement in place, some states will offer you a credit for taxes paid in the state where you are neither living nor working. In order to receive the credit, you must file a tax return in both states.
“You ultimately sort of end up paying the higher of the two rates, but you don’t pay twice,” Walczak said.
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