Working from home has its perks, but it also comes with its fair share of tax complications. Last year, 13 percent of full-time employees in the U.S. worked from home, and 28 percent worked a hybrid model. Many of these individuals worked in a different state than their employer, leading to complex income tax situations and, in some cases, double taxation.
Income is generally taxed where you live and where you work. If you live and work in the same state, you’ll be taxed there. However, if you live in one state and work in another, you could be taxed in both. Thankfully, every state with an income tax offers a credit for taxes paid to another state. But if the second state has higher income tax rates, you would end up paying more.
Double taxation can occur in states that tax people where their employer’s office is located, even if they work remotely. This is known as the ‘convenience of the employer’ rule, and it’s in effect in Connecticut, Delaware, Nebraska, New York, and Pennsylvania. If your employer is based in one of these states, but you’re working elsewhere for your convenience, you might pay income taxes both in the state where you live and work and in the state where your employer is based, without an offsetting credit.
For those commuting across state lines, tax season could bring headaches. Splitting your work days between different states means you owe taxes proportionate to the time worked in each state. However, state reciprocity agreements can simplify this process. Under these agreements, neighboring states decide to tax cross-border workers only in the states where they live. There are currently 30 reciprocal agreements across 16 states and the District of Columbia.
As remote and hybrid work arrangements modernize the U.S. economy, it’s crucial for state policymakers to modernize their tax codes accordingly. For more information on this topic, visit Tax Foundation.
Note: This article is for informational purposes only and not intended as advice. Please consult a designated tax professional before making tax planning decisions.