By: Joseph A. Bellinghieri, Esq.
As many of us adjust to the reality of working from home, a new complication has set in: what to do about state taxes. Many people have a situation where they live in one state and commute to a job in another–for instance, you live in Pennsylvania, and drive to work in Delaware. You typically pay income taxes in both states. Now that many people are working from home, the question has arisen: Do you still still have to pay taxes in another state if you are not physically performing work in that state?
When we consider the taxes on our wages, we typically contemplate items such as federal income taxes paid through withholdings and other payroll taxes used to fund the Social Security and Medicare programs. As we all learned when we received our first paycheck, these amounts are significant. We often minimize the relevance of state income taxes because they are normally smaller than the amounts due to the federal government.
Typically, an individual will pay taxes on all their income to the state in which they reside. Residency is often defined as the location of an individual’s primary home or a location in which they have a second home and spend the majority of their time during the year. Even though a person may not reside in a particular state, they may be liable to pay taxes to that state if they earn income there as a non-resident. The most common of these items are wages earned for work performed in a particular state by a nonresident who commutes to their job location from their state of residency. ln that situation, the wages are taxed not only by the person’s home state but also by the state in which they performed their work. However, most states, including Pennsylvania, mitigate this double taxation by providing a tax credit to their residents for income taxes paid to other states. However, for individuals who normally work in high-tax states but reside in ones with lower income taxes, many times this credit doesn’t entirely address the effect of the double taxation and they will ultimately pay more state income tax than their peers who live and work in their state of residence.
Since so many employees are now working from home and away from their actualjob site, a question arises as to the location where an individual performs their job and earns their wages and which state is able to tax those wages. The primary
question that arises in that situation is whether their wages are still being earned in the state in which their job is located such that it is able to tax them, or are those wages being earned in their home state because that is the location in which the work is performed. The complexity of this question is exacerbated by the fact that most state tax codes are different and may have varying answers to this question. For instance in Delaware, you can file additional forms which show the dates you worked outside the state, and you should be able to receive a credit for those days against Delaware taxes.
As the U.S. Congress continues to fashion responses to the COVID pandemic, they have also begun to consider this issue. Senate Republicans have recently put forth a proposal for supplemental legislation to the Coronavirus Aid, Relief, and Economic Security Act (Cares Act), known for now as the Health, Economic Assistance, Liability Protection, and Schools Act (Heals Act). One of the proposed provisions in the Heals Act addresses this little-contemplated question of state tax law in hopes of providing a uniform rule and simplifying state tax filings for affected workers. lf passed, the Heals Act would modify state income tax rules by mandating that through 2024, employees who perform employment duties in multiple states would be subject to income tax only in their state of residence or any states in which they are present and performing employment duties for more than a limited time during the calendar year. Alternatively, the proposal would also allow employers to treat employee wages as earned in the state where an employee’s office is located and not in the state in which they are working from home. As noted in the proposed legislation, these provisions are intended to alleviate the confusion and create uniform procedures for assessing state income taxes on remote and mobile workers affected by government shutdown orders due to the COVID pandemic and changing work conditions during the economic recovery.