The COVID-19 pandemic accelerated a trend that was already well underway: employers letting their workers perform their jobs remotely, from home, most or all of the time. But even if you and your employer both know exactly where you live and work, you may be surprised to learn that state departments of taxation can have some very different ideas about where “here” is. As a result, Texans, Utahns, and Arkansawyers who work for New York- or Massachusetts-based companies will have income taxes withheld from their paychecks, even if they’ve never set foot in the home office.

In the wake of the pandemic, dozens of major companies are embracing employees’ desire to stay remote, increasing their support for working from home permanently. Some businesses have even closed offices or let leases lapse, counting on a physically distant, flexible workforce to reduce their real estate needs.

In many ways this can be a win/win: employers can save overhead costs on expensive square footage in high-demand cities, and employees can save time and money by skipping the commute and dialing in from, basically, anywhere they want. New York, San Francisco, and Los Angeles are expensive; maybe you want to move to Montana and dial in from the woods, or get a nice little ocean-view place in Florida. Unfortunately, as far as the state is concerned, your beachside cabana may as well be squarely in the middle of Manhattan, and you will be taxed as such.

Boundaries

Even before COVID, living in one state but working in another was a common situation in many of the biggest US metropolitan areas. Many commuters into New York live in New Jersey or Connecticut, for example, and huge numbers of workers in Washington, DC live in Maryland, Virginia, or sometimes even farther out in Pennsylvania, West Virginia, or Delaware. Kansas City sprawls into both Kansas and Missouri, so traveling across city limits can mean crossing state lines. Any major city near a border likely has loads of workers that saunter over that line every day.

That’s tricky, from a tax perspective, because both the state where you perform a job and the state where you actually live are going to want to try to tax your income. Still, only one state at a time can, and most jurisdictions with a lot of overlap have agreements worked out with their neighboring states that make it easy for workers to take state withholdings and pay state tax where they actually live. (I, for example, only had to fill out one short form when I worked in downtown Washington, DC to make sure my taxes were properly withheld across the river in Virginia.)

The increase in remote work, however, means as offices downsize, some employees are now migrating to areas of the country where there are not tax agreements in place, leaving individuals to try to muddle through multiple states’ tax codes on their own. Even more challenging: states are losing money hand over fist due to the pandemic, and are likely to be more aggressive about chasing down every dollar they can claim.

Seven states—Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania—have so-called “convenience” rules on the books that require any work performed for an employer based in their state to be taxed as if the worker performing the job is in their state, no matter where the employee is actually located. Those states are still attempting to collect tax from telecommuting workers, and other states are fighting back.

New Hampshire, which is one of nine states that does not have an income tax, is suing neighboring Massachusetts over its convenience rule. Four other states—New Jersey, Connecticut, Hawaii, and Iowa—are supporting the suit.

https://arstechnica.com/?p=1732300