Guest post by Laurie Marson, CPA, Marson Accounting, Consulting and Tax Services PLLC
Even before the COVID-19 pandemic hit, many workers were starting to enjoy the flexibility of remote work. Now even more workers are sheltering (and working) in place – in their homes, with relatives, in vacation homes or wherever they feel safe. While this added flexibility is a great thing on many fronts, it may create a tax issue for employees if their employers aren’t meeting tax withholding requirements for the tax jurisdictions where their team members are physically working.
Tax rules are complicated, to say the least! Generally, the location of a “worker’s feet” when income is earned is where income tax is due. While most tax jurisdictions follow this basic concept, some states (notably New York) have implemented “convenience of the employer” provisions. This means that a New York-based company must continue to withhold New York income tax, even when employees are not working in New York, unless the employer specifically requires those employees work in that alternate location. Employees that work for companies based in the states with “convenience of the employer” provisions may pay higher taxes. For example, if the employee has sheltered in place in Tennessee (a state with no individual income tax), they will still have to pay New York income taxes even though they are working in Tennessee. If sheltered in Georgia, they will be required to pay tax to both Georgia and New York. (In this scenario, the employee cannot request a tax credit from Georgia because the income was actually earned in Georgia.)
To further complicate matters (like we need that!), some states have reciprocal agreements where the home state releases any right to taxation – through exemption and/or credit mechanisms – to the state where the work is actually performed. In states with this type of agreement, the company must apply for this benefit in advance. If they don’t, the reciprocal arrangement may not be applicable. And when working from home, the home state does have the right to tax the employment income and the employer should be withholding home state tax versus the normal work state tax.
Since we were unexpectedly thrust into this remote working environment, many employers may not have addressed these issues with their employees. This can lead to an unfortunate tax surprise for employees who may suddenly be required to pay more tax if their employer fails to withhold the proper amount of tax and remit it to the proper state. Does this apply to you? Ask yourself these questions:
- Does your employer know where you are working now?
- Do they collect that location information from you directly (time reporting that includes work locations), passively (monitoring your cell phone location, computer IP addresses, etc.) or are they simply withholding state/local taxes as if you are still working in the office?
- Have they provided guidance on what locations are acceptable and what to do if you need to work elsewhere?
- Have they provided any guidance on what you should, and should not, do as part of your company employment in your location?
If not, ask. As an employee, you are not protected from state and/or local tax obligations if your employer fails to withhold and/or report wages in the jurisdictions where you work. This may result in an unexpected tax filing and payment obligation. In a self-assessment tax system like we have in the US, everyone who receives income must report their earnings and pay federal income taxes as well as any taxes due to state and local jurisdictions where that income was earned. All individuals should confirm, either personally or with the help of their tax advisor, that they are filing the necessary income tax returns in each jurisdiction that imposes taxes on their income.
Laurie Marson, CPA specializes in individual US tax compliance for individuals with complex, global situations. Her clients often have family businesses and personal investments outside the US. She assists US inbounds and advises global employers in areas related to risk management, global payroll, and tax compliance. Check out her website at www.marsonaccts.com.