To navigate the coronavirus pandemic, companies have had to act quickly and increase their flexibility on just about everything. Day-to-day business functions have been turned upside down by procedures to keep employees safe, leading to a surge in work-from-home (WFH) arrangements.
Over the course of the year, employers and employees have found ways to continue operations remotely, but a major consideration looms: what does this mean for employees’ 2020 taxes? While April 2021 might feel far away, the following are some insights on the tax implications of telecommuting that you can share with your workforce now.
Telecommuting from a primary residence
For many, working from home has meant setting up shop in a primary residence, whether from an established or makeshift home office. While working from home presents its own unique challenges, children and pets crashing video calls may be the least of their WFH worries—especially if an employee is now working from home
If you have employees who regularly commuted to an office outside of their resident state but are now working from home, they may think they no longer have to pay tax to the nonresident state—but that may not be true. Six states, including New York, have a convenience rule, which means the nonresident state will continue to tax employees that work from home in a different state. Additional states have also recently enacted convenience rules, due to the rise in WFH.
This tax is in addition to taxes that could be owed to their resident state. Your employees could end up owing tax to two states—in essence, double tax on the same income. While some states may allow a credit in this situation, not all do.
Additionally, employers need to be cognizant of how this could affect an employee’s withholding.
Working from a second home
As cases of COVID-19 began to climb, especially in densely populated cities, many around the country fled to second or vacation homes if they could. The location of this second home determines what tax liabilities these employees may now be facing.
There are a few questions employees in this situation need to ask themselves to determine what tax liabilities they may be facing:
- 1. Is my second home in the same state I work in?
- 2. Does the state I am working in tax nonresidents?
- 3. Am I a resident of the state my second home is in?
Depending on their answers, employees could face many of the same double taxation issues as if they were telecommuting from their primary residence but regularly worked in a different state—with the added headache of a potential third state now seeking taxes on their income.
An individual’s domicile is defined as the place where they have a true, fixed, permanent home, and the place to which, whenever absent, they intend to return. It does not change monthly or yearly, but there has been a lot of attention on changing domicile since the pandemic started. It is important for your employees to understand it is not that simple. Once domiciled in a state, an individual’s domicile continues until a new one is established by:
(1) Abandoning the old domicile (2) Having no intent to return to the old domicile (3) Establishing physical presence in a new state (4) Having the intent to make the new state their domicile
State auditors will require an individual to prove all of these conditions through a combination of facts and circumstances—but even if proper steps are taken to change an individual’s domicile, an individual could still owe taxes to their former state because of convenience of the employer rules. Your employees risk ending up in a situation where they have to pay tax to their new domicile state and to the state where their employer resides, with no credit for the double tax. As you can see, tax laws can be complicated and vary widely from state to state. 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. Employers should make sure their employees understand the tax implications of their telecommuting decisions now to avoid any surprises come next tax season.