As if lockdown restrictions aren’t enough, US taxpayers have to face yet another uncertainty. How do work from home taxes work? This concept was all fun and games until we have to think about paying income tax. If you were working at an office in New York pre-pandemic, and now you work from home, say in Michigan, to which state will you pay your income tax?
New York has laws that say you can be taxed even if you are working from another state. This isn’t the only state that can do such a thing. When the COVID-19 situation first escalated, a lot of people were forced to work from home. In the aftermath of almost one year since the first lockdown, there is a lot of confusion on how these employees will get taxed this tax season.
Understanding Work From Home Taxes
The gray area stands mostly for Northeastern workers who live in one state but work for another company. The problem here is that they might get taxed twice. The genesis of this issue is this. States like Delaware, Arkansas, Connecticut, Nebraska, New York, and Pennsylvania have laws that tax people based on where their company is located, no matter if they are living in another state.
Massachusetts decided to set its version of this law this year. Before this pandemic, most states offered tax credits to offset income tax in other states. In 2019 if you worked in Indiana but worked in Illinois, you paid taxes based on which state you were working in. If you are working from home in Indiana but the company’s located in Illinois, you pay your income tax based on the state you are currently living in. That’s common sense now, isn’t it?
Well, not for the seven states mentioned earlier. Suppose you live in Indiana, but your company is located in New York.
The Pre-Pandemic Situation
Before the pandemic, you paid income tax to New York, and Indiana offset your tax liabilities with a tax credit to keep you from paying twice. How will this turn up now if you are working from your home in Indiana, but your company’s located in New York? This state doesn’t offer tax credits for such a thing.
One question raised is whether you are working from home out of the necessity of choice. At the moment, you will be paying taxes only based on the location you are working from, which is home in Indiana, out of necessity. Yet, what happens when the lockdown restrictions are lifted? How about when employers give a chance to workers to keep working from home? That’s the gray area regarding taxes.
Let’s take Massachusetts as an example. Past March, the Commonwealth enabled a rule. This rule forces employees (whose jobs were located in Massachusetts at the beginning of the pandemic) to pay taxes to the state, even if they are now working from a different location.
Before the pandemic, all this mess was way more straightforward. Massachusetts was in its right as a state to tax income earned within the state. But now, this doesn’t add up with basic common sense. Now you might have to pay income tax to Massachusetts only because the company owns some empty Boston offices.
What’s Next for Work From Home Tax?
Congress might come up with a solution. The Multi-State Worker Tax Fairness Act, introduced in 2016, stops states from taxing non-resident employees working from home. This act restricts double taxation until 2024. However, this act is just a proposal, which is not applied at the moment. Other states such as Virginia and Washington D.C. have decided to only tax people based on where they live, no matter where their company is located.
A recent report from Bloomberg Tax & Accounting has tried to explain what waits for businesses and employees in 2021 regarding taxes. First of businesses are already suffering from buying one-time supplies such as masks and gloves to keep their employees safe. According to the IRS, these expenses are not deductible from their taxes. Regarding double taxation, the report specifies how the changes in the way of working have created a gray area for many businesses.
Will This Impact You?
Everyone wants to avoid having problems with the IRS or not paying any unpredicted penalty due to uncertainties in income tax paying. Worst part? People aren’t even aware that this is a problem to be faced. More than 55% of ‘working from home’ employees have no idea about the impact that the latter might have on their income tax in a recent poll.
On the other hand, more than 47% have no clue that each state has its own laws and rules regarding income tax when it comes to remote work. The number of people working from home has increased drastically. This has caused many of them to be unclear regarding their present tax liabilities. To which state do they owe the money?
Some states have come to agreements with other states about this situation. A solution is yet to come. The Remote and Mobile Worker Relief Act of 2020, S. 3995, would give uniform principles to alien state and local income tax. This act would give a 30-day fairness period during which a non-resident wouldn’t be liable to state or local income tax. During the pandemic, you’d have to stretch out the time frame to 90 days under the proposed law.
The Way Forward
Everyone is hoping that this legislation will pass. What’s more, now it’s time for remote workers to get informed regarding their tax liability situation—especially workers whose companies are located in the cities mentioned earlier.
States like New York and others remain unclear on how they will approach this situation. Working from home is a culture that has just been planted into the economy. And looking at the Coronavirus situation, this culture is here to stay. While no solution has been yet introduced to be final, one thing is for sure, work from home taxes will add to the income tax issues this year.
