The impact of US state taxation on mobile workers
The taxation of telecommuters and nonresident workers varies by state, and can have significant consequences for a mobile worker. As individuals continue to work across multiple locations, it is important to understand the state tax impact of such activity.
State Taxation in the US
Most US states assess an income tax on wages and other income that an individual earned in the state. State income tax generally funds a state’s budget and is imposed on an individual in addition to Federal income tax. States assess income tax based on residency status, and either assess tax at a flat rate or a progressive rate. A small number of states assess no income tax at all.
De Minimis Exceptions
Many states tax income earned by a nonresident—an individual who is not a resident of the state and who has its income tax laws applied to such individual—who performs services within their borders, even if the employee works in the state only for one day. Some states, however, have a de minimis threshold of days worked in the state or earnings amount that must be met before nonresidents are subject to income tax in those states.
Some states that border one another have entered into reciprocity agreements with each other. Under these agreements, one of the border states agrees not to tax the wages of the other border state’s residents who work in the other state. As a result, the individual does not need to file a nonresident income tax return with the border state where they are physically performing services. In addition, the employer often does not need to withhold nonresident income taxes from that individual’s wages, even if the resident individual works primarily in the nonresident state.
Convenience of the Employer
Generally, in the case of nonresident workers, states will tax only income that is earned in the state. However, some states take the position that wages paid to a nonresident worker who regularly works in the nonresident state are subject to income tax if the employee is working outside the state for the worker’s own convenience, rather than as a condition of employment. Under the convenience of the employer rule, for income tax to not be imposed, there must be a direct business benefit to the employer in having the employee working outside the nonresident state.
Impact on Teleworkers
Employees working remotely are generally subject to the taxation rules of the jurisdiction where they are physically present and regularly performing services. Even though some employees have changed their normal work locations because of the COVID-19 pandemic, many jurisdictions have not changed withholding requirements or income tax filing thresholds based on an employee’s temporary telework location. Therefore, an employee who was previously commuting to a nonresident state for work, and who is now working from home in their resident state, may continue to have tax assessed in the nonresident work state.
New Hampshire v. Massachusetts
The US Supreme Court recently declined to review New Hampshire’s petition to sue Massachusetts over its taxation of remote workers. The Supreme Court’s involvement would have provided clarification on states’ ability to tax individuals beyond their borders. Under Massachusetts’ current emergency regulation, the state will tax nonresidents who worked in the state prior to the pandemic, but who are now working from home in their resident state.
The Court’s decision not to intervene, along with the need for tax revenue, could encourage other states to issue similar teleworker tax policies. The State of New York has been criticized for its nonresident tax policy and has recently broadened the scope of tax audits that target remote workers.
Remote and Mobile Worker Relief Act of 2021
The Remote and Mobile Worker Relief Act of 2021 (US Senate Bill S. 1274), previously introduced in the US Senate as The Remote and Mobile Worker Relief Act of 2020 (US Senate Bill S. 3995), seeks to limit the authority of states to tax certain employment income that is earned from work performed in other states. The legislation would establish a permanent 30-day threshold before an income tax obligation can be enforced by a nonresident state. For the 2020 and 2021 tax years, the threshold is set at 90 days to help ensure that medical professionals and other workers who traveled to support areas impacted by the COVID-19 pandemic do not face unexpected or increased state income tax bills from these nonresident states. The bill also would allow employers to continue to withhold taxes on wages based on the employee’s pre-pandemic location.
Multi-State Worker Tax Fairness Act of 2021
The Multi-State Worker Tax Fairness Act of 2020 (H.R. 7968) also was recently reintroduced in the US Senate as the Multi-State Worker Tax Fairness Act of 2021 (US Senate Bill S. 1887). The bill establishes nonresident taxation based on a worker’s physical presence and prevents a state from assessing an income tax on the compensation earned by an individual who is not physically present in the state. The legislation also ensures that teleworkers and mobile workers are not subject to out-of-state income taxes.
The bill was created in response to Massachusetts’ emergency regulation, which allows the state to continue to tax residents of other states who worked in Massachusetts prior to the pandemic, but who are now working from home in their resident state.