TAXING MATTERS
T . MARK RUSH , CPA
Partner Ham , Langston & Brezina , LLP
Tax Shocks Loom for Remote Workers
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The COVID-19 pandemic accelerated a trend that was already well underway : employers letting their workers perform their jobs remotely , from home , most or all the time .
But even if your clients and their employers both know exactly where they live and work , they may be surprised to learn that state departments of taxation can have some very different ideas about where “ here ” is .
As a result , individuals who work in Texas , Utah , and Arkansas who work for New York- or Massachusetts-based companies will have income taxes withheld from their paychecks , even if they ’ ve never set foot in the home office .
In the wake of the pandemic , dozens of major companies are embracing employees ’ desire to stay remote , increasing their support for working from home permanently . Some businesses have even closed offices or let leases lapse , counting on a physically distant , flexible workforce to reduce their real estate needs .
In many ways , this can be a win / win : employers can save overhead costs on expensive square footage in high-demand cities , and employees can save time and money by skipping the commute and dialing in from , basically , anywhere they want . New York , San Francisco , and Los Angeles are expensive ; maybe you want to move to Montana and dial in from the woods or get a nice little ocean view place in Florida . Unfortunately , as far as the state is concerned , your beachside cabana may as well be squarely in the middle of Manhattan , and you will be taxed as such .
Even before COVID-19 , living in one state but working in another was common in many of the biggest U . S . metropolitan areas . Many commuters into New York live in New Jersey or Connecticut , for example , and vast numbers of workers in Washington , D . C ., live in Maryland , Virginia , or sometimes even farther out in Pennsylvania , West Virginia , or Delaware . Kansas City
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sprawls into both Kansas and Missouri , so traveling across city limits can mean crossing state lines . Any major city near a border likely has loads of workers who saunter over that line every day .
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From a tax perspective , that ’ s tricky because both the state where you perform a job and the state where you actually live are going to want to try to tax your income . Still , only one state at a time can , and most jurisdictions with a lot of overlap have agreements worked out with their neighboring states that make it easy for workers to take state withholdings and pay state tax where they live . ( I , for example , only had to fill out one short form when I worked in downtown Washington , D . C ., to make sure my taxes were properly withheld across the river in Virginia .)
However , the increase in remote work means as offices downsize , some employees are now migrating to areas of the country where there are not tax agreements in place , leaving individuals to try to muddle through multiple states ’ tax codes on their own . Even more challenging : states are losing money hand over fist because of the pandemic and are likely to be more aggressive about chasing down every dollar they can claim .
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