Remote work has been on the rise recently, and in a dramatic way. The COVID-19 pandemic has forced many employees out of offices and other physical worksites and into their homes. Now that the transition to remote work has been forced upon companies, many employers and employees are realizing how rewarding and efficient it can actually be.
Employers have found that they benefit from employing a remote workforce. With a smaller team, or possibly no team at all, in a physical office, they can save big on leasing expensive office space. Yes, they do have to be sure to hire remote workers that they trust—which is why they’ll often run background checks or credit reports in order to screen candidates before making an offer. But, equipped with a team that they trust, many employers are finding the growing trend towards remote roles to be working in their favor.
In addition, statistics show that, in general, employees love working remotely. In fact, 77% of remote employees claim to be more productive when working from home, and a staggering 99% of workers report that they would like to continue remote work in some capacity going forward.
With all the benefits of remote work, there are some complications as well. For example, working remotely can make filing taxes more confusing. This is because many people now work remotely in one state for a company based in another state, and the two states likely have different tax laws. Don’t worry, though—this guide will clear the situation up by telling you how to file taxes if you’re a remote employee who worked out-of-state this year.
Where to File Your Taxes
To put it simply, your personal income taxes should be filed in the state where you reside, even if the employer you’re working for is based in a different state. This applies whether you’re considered a regular W-2 employee or an independent contractor (freelancer). The state that you actually live in, where you have a permanent home, is known as your resident state or domicile.
This applies to everyone, including remote workers. The following definition of remote work is provided by the United States Office of Personnel Management: “Long-distance telework, also referred to as remote work, is a flexible work arrangement in which an employee works most or all of the time from a different geographic area.” The definition of remote work is important because not everyone that works from home is officially considered a remote worker, which can have an impact on where you file taxes.
For instance, employees that are temporarily working from home as a result of the COVID-19 pandemic are not officially considered remote workers if the expectation is that they will return to the worksite at some point in time. Thus, if you’re currently in this situation, keep in mind that for tax purposes you will not be considered a remote worker.
Do I Need to File Taxes in Two States?
In general, if you’re working remotely you’ll only have to file and pay income taxes in the state where you live. However, in some cases, you may be required to file tax returns in two different states. This depends on your particular situation, the company you work for, and the tax laws of the states involved.
Let’s start by defining two terms and making clear the difference between them: a resident state and a non-resident state. As mentioned above, the resident state is the state that you actually live in, where you maintain a permanent residence. The taxes in this state apply to all of your income, regardless of the state it’s earned in.
A non-resident state, on the other hand, is a state where you haven’t lived for the past year, even though you may have earned income there. Non-resident income tax laws vary on a state-to-state basis, but if the non-resident state is listed on your W-2 form, then you’ll likely have to file a non-resident state tax return.
So when you live in your resident state, but the non-resident state is listed on your W-2 form, you’ll have to file two tax returns, one for each state. This means you’ll be double-taxed, but it doesn’t necessarily mean that you’ll pay twice as much in taxes. When you live in one state but work in another, the resident state typically provides you with a tax credit for the taxes paid to the non-resident state in order to avoid double taxation.
Some states even have agreements with neighboring jurisdictions that cut down on double taxation for non-resident workers. For example, New Jersey has a reciprocal personal income tax agreement with Pennsylvania, meaning that any residents of New Jersey who are employed in Pennsylvania are not subject to the latter’s state income tax.
Some people find themselves in a situation where their employer is based in one state, they reside in another state, and work in a third state. For instance, perhaps you work remotely for an employer based in California while maintaining a residence in Oregon, but then you go to Idaho to care for a sick relative for a few months and continue working while you’re there. A situation like this makes things a bit more complicated.
In this case, you’d have to consult the tax laws of the different states involved in order to arrive at the best course of action. Keeping with the above example, you’d want to take a look at Idaho’s tax laws to see whether you’d be subject to non-resident income taxes for the time you worked in their state.
States With No Income Tax
Some states don’t charge residents any income tax, so, as a result, you don’t have to file a resident tax return if you live and work in them. If you work in one of the following states, and don’t have any other non-resident states listed on your W-2 form, then you don’t have to worry about paying state income taxes at all:
- New Hampshire
- South Dakota
While these nine states are all income tax-free, most states do require residents to file a tax return. And keep in mind that even if you live in one of the above states, you’ll have to file a non-resident tax return if a state that does charge an income tax appears on your W-2 form.
Be careful when filing your taxes, as you don’t want to be subject to any penalties. Be diligent in researching the tax laws in your resident state, as well as any other resident states. And if this all sounds too overwhelming, consider getting professional help with your income taxes.
Jacob Dayan, Esq. is CEO and co-founder of Chicago-based Community Tax, LLC, a U.S. provider of tax resolution, tax preparation, bookkeeping, and accounting services. He is also a managing partner of Consumer Law Group, and Illinois law firm assisting consumers with various legal needs. He began his career on Wall Street as an analyst structuring new issue mortgage and asset-backed securities. Jacob graduated Magna Cum Laude from Mitchell Hamline School of Law and holds a bachelor’s degree in Business Administration from the University of Michigan’s Ross School of Business.