Key Points:
- With Tax Day in the United States delayed until 17 May, now might be a good time to talk to your clients about how pandemic-imposed working-from-home (WFH) arrangements may affect their tax liabilities.
- The income tax system across the United States is something of a patchwork quilt, with each state and municipality having its own unique system.
- With many commercial offices closed, many workers have been forced to work from home, raising questions about which taxing authority has the power to tax their income.
- States like New York tax nonresident employees based on the portion of their work days spent in the state, but only if the remote work is out of necessity, not convenience.
- States like Pennsylvania and Massachusetts consider non-residents who are temporarily working from home due to the COVID-19 pandemic to still have income sourced in the state.
- Clients who must pay income tax or employers who must withhold tax should consult a local tax professional to determine their obligations.
- Paying tax to the state where they work and filing a claim for refund may be the best approach for clients in states without an agreement on income tax imposition.
The income tax system in the United States is complex, with each state and municipality having its own unique system for taxation. With many commercial offices closed due to the COVID-19 pandemic, many workers have been forced to work from home, often in a different state or municipality than their office. This raises questions about which taxing authority has the power to tax their income.
For example, in states like New York, nonresident employees are taxed based on the portion of their work days spent in the state. However, this only applies if the remote work is out of necessity, not convenience. If a worker chooses to work from home instead of commuting to the office, all of their income may be subject to New York income tax, regardless of where they physically work.
Other states, such as Pennsylvania and Massachusetts, consider non-residents who are temporarily working from home due to the pandemic to still have income sourced in the state. This means that their compensation remains subject to state income tax and that employers are required to withhold taxes.
With Tax Day in the United States delayed until 17 May, now is a good time for advisors to discuss with their clients how these WFH arrangements may affect their tax liabilities. It is important for clients to consult a local tax professional to determine their obligations for withholding income tax or filing a tax return. Clients who live and work in different states without an agreement on income tax imposition may choose to pay tax to the state where they work and file a claim for refund to avoid underpayment penalties and interest.
