Employees who normally work in an office in one state, but live (and are now working from) another may be facing additional tax-filing complications.
The messiness of being taxed in multiple states is at least on Congress’ radar; the HEALS Act proposed by Senate Republicans last month would allow employees who perform employment duties in multiple states to only be subject to income tax in their state of residence and any jurisdiction where the employee is present and working for more than 30 days during the calendar year—or 90 days for frontline health-care workers.
The HEALS provision would only apply through 2024 and wouldn’t cover professional athletes, professional entertainers, qualified approved film, television, or other commercial video production employees, or certain public figures. And even that bill, which is going nowhere, would still allow employees working from home during the pandemic to be taxed in their home state and the state where their normal office is.
Bottom line: there is currently no national standard for the withholding, filing and payment of state income taxes for employees who work in more than one state or work in one state and live in another.That means you may have tax requirements where you typically work as well as where you live. Usually, you can sort that out via withholding, tax agreements, and credits.
So what if working at home in one state when your company is in another state means that you’re subject to tax in both places? If either state has a physical presence rule (most states do), figuring the split between the two can be confusing. Typically, you may have too much tax withheld from your paycheck for your nonresident state and not enough for your resident state.
For example, if you live in Connecticut but you normally work in New York, you’ll likely have to file a resident tax return in Connecticut and a nonresident tax return in New York. If you worked in New York all year, it should be relatively easy: only New York withholds taxes and then when you file your Connecticut tax return you get a credit for the taxes paid to New York. But if you worked in New York through March – and then in Connecticut through August – and then back to New York? Not so simple.
Remember the tax credit? To make it work, you have to file in the right order. You first file and report income to the state where you work and then claim the credit on your resident tax return. If you mix up the order, you may end up missing out on the credit and get stuck paying additional state tax, or miss out on a refund you’re otherwise entitled to.
Moreover, that assumes that the states agree on the rules. It gets more complicated when states have differing tax rates and residency rules.