Compliance with non-resident state taxes is difficult enough for athletes or other professionals who occasionally travel out of state to work. For telecommuters and other home-based workers that work for a company based in another state, the tax situation can get even more complicated. As a general rule, if you work from home, you are required to pay state taxes in the state where you reside and work, not the state where your company has its headquarters. However, certain states have rules that effectively require home-based workers to pay taxes twice on the same income.
Commonly called the “telecommuting tax penalty,” this tax situation arises when an employee lives outside of the employer’s state, and then has to pay taxes in both states. As Robin Hardman outlines in her Huffington Post article, all states have the right to tax the income of their own residents, no matter where they earn it.
However, some states, such as New York, have regulations requiring both residents and non-residents to pay state income taxes on all income earned from a company that’s located in that state, even if the employee lives and works in a different state. Other states like Connecticut require employees to pay state income tax on all income earned while physically working in their state, even if it’s for an out-of-state company. Thus, there are people who live and work in Connecticut, as employees of New York-based companies, who are subjected to double taxation.
If your employer requires you to live out of state, you may be able to escape non-resident taxes. But if you live out of state for your own sake, even if your employer agrees that it is a good idea, a “convenience of the employer” rule could require you to pay taxes in both states. New York, Delaware, Pennsylvania, and Nebraska all have these regulations, and New Jersey follows the same practice, though it doesn’t have a formal rule in place.
Some states will issue tax credits for the non-resident taxes imposed on you by other states, but it’s still possible your overall state tax liability will be higher. If you work for a company in another state, check with both your home state and your employer’s state to clarify how regulations like these will impact your taxes.
Double taxation is a problem not just for the home-based workers affected, but also for the companies that employ them and the tax-imposing states themselves. Employers have to contribute to income taxes in both states too after all, and these penalties can serve to drive businesses out of the state. Nicole Goluboff, author of The Law of Telecommuting, explains the many harms caused by these tax penalties in her 2014 presentation, “Tax Penalties for Telecommuting.”
Last year, the “Multi-State Worker Tax Fairness Act of 2014″ was introduced to Congress. Many telecommuters had high hopes for the bill, which proposed to prohibit states from imposing income taxes on non-residents who work from home, but it appears to have died in the 113th Congress. For now, as these confusing state regulations stand, you might be worried about your own tax liability. If you think you may be obligated to pay income taxes in more than one state, speak to a tax advisor or contact the department of taxation in the appropriate states.