Sarah S. Kim, J.D., LL.M.
04.05.21 | SALT Chat
Due to the COVID-19 pandemic and the stay-at-home orders that followed, many employees telecommuted for substantial portions of 2020, and worked from places different from their regular work locations. When an employee lives in one state but works in another, she may be subject to taxation in both states. To eliminate double taxation, some states have reciprocity agreements with neighboring states to ensure than a remote employee is taxed only in her state of residence. In addition, most states provide a resident tax credit for income tax paid to another state. However, such credit may not be available for taxes paid to six states—Arkansas, Connecticut, Delaware, Nebraska, New York and Pennsylvania—that implemented the “convenience rule.” Under this rule, if an employee works from a home in another state out of her own convenience instead of the employer’s necessity, her compensation is treated as earned and taxable at the employer’s location. As a result, she may be taxed by both her home state where she physically worked as well as the employer’s state, resulting in double taxation to the employee.
So, the key question for those states with convenience rules is whether teleworking arrangements resulting from the stay-at-home mandates will be deemed to be for the convenience of the employee or the necessity of the employer?
It is yet unclear how Arkansas and Delaware will treat teleworking days. Nebraska, New York, and Pennsylvania have issued guidance treating wages paid to employees working remotely during the pandemic as income earned at the employer’s location (i.e., effectively treating teleworking days as convenience days). Connecticut recently enacted legislation, for the 2020 tax year, allowing residents to claim a tax credit for income taxes paid to another state that uses convenience rules or taxes income earned while working remotely from Connecticut due to COVID-19 (e.g., Massachusetts).
Massachusetts, in response to the pandemic, adopted an emergency regulation which, although it is not per se a convenience rule, requires nonresident remote employees who worked in Massachusetts prior to the pandemic but now work outside of Massachusetts to continue to have Massachusetts income tax liability. New Hampshire filed a claim in the Supreme Court of the United States, challenging the constitutionality of Massachusetts’ regulation.
In addition to the states mentioned above, several other states have issued guidance on the state tax treatment of telecommuting. If you found yourself teleworking in 2020 and have any questions about the tax implications, I can be reached at 646.346.6467 | firstname.lastname@example.org or contact your Berdon tax advisor.
Sarah S. Kim is a Senior Tax Manager in Berdon LLP’s State and Local Tax Group with nearly 10 years of professional experience. Sarah advises Fortune 500 and middle market businesses across an array of industries. She has experience with various types of taxes, including corporate income and franchise tax, sales and use tax, personal income tax, unincorporated business tax, commercial rent tax, and real estate transfer tax.