The 2020 Pandemic Tax Scramble. WFH this Year? 2020 Keeps on Coming, Double Taxes Giving Taxpayers Whiplash

2020 continues to wallop — it turns out that some remote workers may owe income tax in more than one state. The BIG question on many minds is if states can collect income tax from nonresidents who are working remotely for companies that are in-state? We’re about to find out.

Photo by Sharon McCutcheon on Unsplash

Bringing home the bacon has taken on new meaning in these work from home times.

Tens of millions of Americans have been WFH, including an estimated 2.1 million who used to shuttle across state lines for their commute. But now Massachusetts has ruffled feathers by declaring that nonresidents employed in the state before the pandemic must still pay the state’s 5% income tax — even if they are working remotely. New York requires nonresidents who work remotely for an in-state business to pay New York income tax. The big question on many minds: Can a state collect income tax from nonresidents who are working remotely for companies that are in-state? We’re about to find out.

Five states besides Massachusetts — Arkansas, Delaware, Nebraska, New York, and Pennsylvania round out the quintet — claim that they can. In most states, only income earned within their borders is taxed. For example, a consultant who splits her time equally between offices in Los Angeles and Portland only has to pay California income tax on half her salary — a rule that applies to most professionals and athletes.

Some states take a more balanced approach.

For example, Connecticut and New Jersey provide tax credits to residents for income taxes they pony up to New York — however, the cost is high, and especially steep, in this challenging year — roughly $1.5 billion combined in revenue.

One would think that given the severity of the almost year-long COVID-19 crisis that there would be a pandemic exception for nonresident telecommuters. But in October, state tax regulators in New York said that there would be no exception for nonresidents working from home unless their company set up a “bona fide employer office at [the] telecommuting location.” Ouch.

New Hampshire sued Massachusetts last fall and is asking the Supreme Court to hear its case (N.H. v. Mass.). The Granite State imposes no income taxes on wages and claims that “Massachusetts has unilaterally imposed an income tax within New Hampshire that New Hampshire, in its sovereign discretion, has deliberately chosen not to impose.” New Hampshire’s case raises major economic questions that affect millions of Americans across the country.

Tax season may hit hard if you’re one of tens of millions of people who have been working remotely outside your home state. You just may need to file returns and pay taxes to more than one state for 2020. Every state has its own unique (read: byzantine) rules made all the more confusing because of pandemic-related vagaries.

Here are some key things to know.

Q: I worked from two states in 2020 — will I owe more taxes?

A: Maybe yes, maybe no. It depends on the states — things vary significantly from one to the other. Some states have no income tax (hello Florida and Texas!), while some are rather bellicose about exacting their pound of flesh (hello New York and California!). Not all remote workers will get caught in the cross-border crossfire — about 15 jurisdictions like Virginia, Maryland, and Washington D.C. have friendlier agreements with neighboring states that allow commuters to file and pay taxes where they live. And some have said that they won’t enforce their typical tax rules for remote employees who worked in their home state because of the pandemic, shared Eileen Sherr, spokeswoman for the American Institute of CPAs, in an interview with the Wall Street Journal.

Q: Is it possible to owe lower taxes than in a regular year?

A: In some cases, those that WFH could actually come out on top and owe less in state taxes for 2020 if their home state (or the state where they are working) is a low-or no-tax state. A Silicon Valley techie who decamped to Austin, Texas, may actually be able to avoid California’s high-income tax on wages earned while domiciled in the Lone Star state.

Q: How do I approach doing my taxes this year if I worked in more than one state?

A: First things first, you need to establish where you were in 2020. How many states did you work in — and how many days did you work in each state? Second, determine the criteria for being deemed a taxable resident of the states where you were. Does the state where you worked have an understanding with the state where your office is located to prevent double taxation like Maryland, Virginia, and Washington D.C.? Find out; it may save you from the double doozy. Third, check to see if there are special coronavirus rules that make these laws different this year.

Q: How can states know if someone has actually worked there?

A: Several ways. Companies include information on W2 forms, and accountants will ask their clients. Neither will risk submitting false information that might jeopardize them — and those that file on their own, beware: Tax returns are signed under penalty of perjury.

Q: How do I find the rules for the states I’ve worked in?

A: Knowledge is power — check your state’s tax website to see what the rules are where you live. AICPA also has this handy chart that can help. Be sure to check taxes on nonresidents if you worked in a state but were not there long enough to qualify for residency.

Q: What else can I do to help from being double-taxed?

A: There are a few things — if you’re in a state that’s aggressive about income taxation, speak with your employer to see if you can be assigned to an existing office in the state where you are working remotely and then withhold taxes for that state.

And if your situation is complicated—perhaps you sold your home, hit a stock bonanza, or suffered a significant loss, got married or divorced—see professional help.

Q: Do New York City residents need to pay New York City income tax if they worked in Tulum/Miami/Charleston/or any other non-NYC locale during the pandemic?

A: Yes, the Big Apple will take its b-i-t-e. Workers who have decamped elsewhere because of the pandemic are still NYC residents (even if they’re having second thoughts).

Q: Can I take a home-office deduction for working from home in 2020?

A: It seems only fair that we should all be eligible for a home-office deduction with all this working from home — but no dice. If you are an employee instead of an independent contractor or business owner — you’re out of luck. As part of the recent 2017 tax overhaul, the standard deduction was nearly doubled, and revoked various Schedule A write-offs. And as you might suspect, one of the deductions that was changed was the partial deduction for unreimbursed employee expenses, like a home office.

Freelancers and self-employed business owners, on the other hand, can deduct a wide array of expenses, including for home offices. But there’s some good news for employees, too: Businesses can reimburse for many pandemic-related expenses that stem from working remotely like office equipment, upgraded internet, improved phone service, and more. These reimbursements do not count as any form of compensation to employees and are deductible for the employer.

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We have to wait and see if the Supreme Court accepts New Hampshire’s case — if the Court does not arbitrate, remote workers unfairly taxed by other states may be SOL, save for rarely-partial state tax tribunals. And some states may start to copy New York’s playbook. 2020 was an incredibly challenging year; perhaps the Court will help ameliorate some of the difficulty by ruling in favor of the people.