By John Drachman
Jim lives in Virginia for a company in North Carolina. When filing his Virginia taxes, he can reduce his tax liability in his home state what he paid in North Carolina.
Jane lives in Delaware for a company in New Jersey. She faces state liabilities in both places for the income she earned out-of-state. This form of double state taxation also occurs in Arkansas, Connecticut, Massachusetts, Nebraska, New York, and Pennsylvania, which have “convenience of the employer” rules on the books. These provisions allow companies in their jurisdictions to levy a withholding tax on their out-of-state employees. In effect, they treat employees as if they work in their employer’s state, even if they perform elsewhere.
“Further muddying the waters is that many of these states leave the details up to employers,” ABC News Ivan Pereira reported. “For example, a technician working in Vermont on a product for a New York company would not typically be considered a New York employee. On the other hand, a Vermont resident who commutes, either physically or virtually, to a New York office could be considered a New York employee,” he said. In both cases, the employee’s status is up to the company – and where you get a situation with double taxation.”
The impact of such double tax provisions has grown in importance to employees and state treasuries as the uncertain post-pandemic world evolves. While record numbers of people quit their jobs and move to other states, state treasurers are looking for ways to replace their diminishing revenues.
Jared Walczak of the Tax Foundation points out that most states like Virginia have rules in place to prevent their taxpayers from being hit with double taxation if they commute out of state for work. Seventeen have so-called reciprocity tax agreements with neighboring states where residents are not taxed if they physically commute to work elsewhere.
“Convenience” policies have invited lawsuits from both sides of Congress. The “Multi-State Worker Tax Fairness Act” for one looks to “limit the authority of a state to levy income tax on the compensation of a nonresident individual to the period in which the individual is physically present in the state.”
The Bottom Line
As telecommuting options grow following the end of the pandemic, Mr. Walczak adds, “State governments and Congress will need to update their rules to fit the new normal.” Each state has its own taxation rules for teleworkers – defined as a person who lives in one state and works from home for a company in another state. The TaxAct website offers convenient state-by-state summaries of individual income tax policies. However, with legislative outcomes uncertain, those telecommuters faced with a potential double state taxation quandary of their own should consider contacting their tax or financial professional for advice before their subsequent tax filing.
John Drachman contributes to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. John is an IABC award-winning writer who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.
