State Telecommuting and Residency Considerations
As many states continue to face substantial budgetary restraints for the 2021 fiscal year and beyond, they are aggressively pursuing revenue collections from residents and nonresidents.
With telecommuting becoming the norm, many individuals find themselves working in states other than their pre-COVID primary office locations. Taxpayers need to consider whether their income will be taxed in the state in which they are working as well as the state in which their primary office is located. Certain states impose a “convenience” rule that sources income to the employer’s office location if an employee is working remotely out of convenience and not out of necessity for the employer.
With telecommuting comes the flexibility to work from any location, not just the state where the individual resides. Since a jurisdiction is able to tax all income of residents (vs. state-sourced income of nonresidents), a change in residency could result in lost revenue to the original state of residency. Therefore, states generally scrutinize a change in the residency status of individuals. Careful consideration must be given to breaking residency in one state while establishing residency in another state.
Some notable announcements that could affect telecommuting taxpayers for 2021 include the following:
Arkansas enacted legislation effective January 1, 2021, requiring that taxpayers who work within and without Arkansas must pay their income tax based on where the work was performed. Prior to this law change, Arkansas used the convenience of the employer rule, whereby a nonresident performing remote work for an employer based in Arkansas was required to pay income taxes to Arkansas.
In March of 2021, Connecticut issued a bulletin providing guidance for a law change that was effective for tax year 2020 only. The law provided relief for employees working remotely. For tax year 2021, remote employees working for Connecticut-based companies need to consider if they will have income sourced to Connecticut.
In March of 2021, Delaware issued a bulletin that temporarily disregarded its convenience-of–the-employer rule until individual taxpayers were permitted discretion to return to offices within Delaware. Effective June 1, 2020, the convenience–of-the-employer rule is applicable to individuals if the employee elected, but was not required, to work remotely.
Massachusetts issued emergency telecommuting rules in 2020 for the sourcing of income for nonresidents and the availability of resident tax credits for resident employees who were telecommuting. The emergency rules were similar to the convenience–of-the-employer rule. The emergency telecommuting rules ended as of September 13, 2021.
New York has remained in defense of its convenience-of–the-employer rule during the COVID-19 pandemic. The Department of Taxation and Finance posted an FAQ with the position that the convenience rule continues to apply regardless of any imposed COVID restrictions. An employee whose primary work location is in New York is subject to New York taxes unless a bona fide office has been established in the employee’s remote location. In 2021, New York has been sending out notices and auditing tax returns of nonresident filers that showed a substantial change of income sourced to New York. New York has also increased audit focus on resident taxpayers who are taking credit for taxes paid to other states.
Pennsylvania issued temporary guidance for taxpayers working from home due to the COVID-19 pandemic, which expired June 30, 2021. Effective July 1, 2021, the pre-COVID income sourcing rules apply.
Similar to Massachusetts, South Carolina issued an information letter in 2020 regarding the sourcing of income for nonresidents who are telecommuting. The emergency rules were similar to the convenience-of–the-employer rule. Those rules expired in September 2021.
Remote work is likely here to stay for the foreseeable future. This means individuals may be working from home in their resident state while the location of their employer may be in another state. Typically, a credit is allowed in the taxpayer’s resident state for taxes paid on income earned in another state. However, when a state has the convenience-of–the-employer rule, it may yield double taxation.
Remote work may lead to an individual meeting the residency requirements of more than one state. Generally, states determine residency based on domicile or statutory residence. Domicile generally refers to the place the taxpayer intends to make their permanent residence. Working remotely from a location other than one’s home state likely does not change the taxpayer’s domicile. Statutory residency is generally determined based on the number of days spent in the state (usually more than 183 days) and could also be based on various other factors, such as whether the taxpayer has a place of abode in the state. If a state determines that a taxpayer is a statutory resident in a state other than the taxpayer’s domicile, this could result in dual residency and both states may tax all of the taxpayer’s income.
The tax impact of remote work and the potential for a determination of dual residency can be costly. Analyzing all facts and maintaining detailed documentation is critical to achieving favorable tax implications.