Remote work poses state tax challenges

Madeline Monroe/The Hill illustration

Lawmakers and tax professionals are concerned that workers could face challenges when they file their state taxes next year as a result of the coronavirus pandemic.

To head off that confusion, Congress and industry groups are pushing to enact legislation that would make things simpler for workers when they file their taxes next year and beyond.

The pandemic has resulted in many people working remotely in states that differ from their regular workplaces. Additionally, some health professionals have traveled to another state to treat patients in areas hard-hit by the virus.

In both cases, workers could end up owing taxes to that new state.

Without action from Washington, those workers could find themselves in unfamiliar tax situations next year, with some needing to pay more compared with their previous workplace. Lawmakers and tax professionals are hoping Congress will soon provide more clarity for workers and their state taxes.

“No health care worker ought to face an unexpected tax bill for the contributions that he or she made to fight the coronavirus,” Sen. John Thune (R-S.D.) said in an interview with The Hill.

States have varying rules for how they tax people who work in their jurisdictions but aren’t residents. About 25 states start subjecting people to their income taxes on their first day of working in that state, while others start the clock a bit later. And then there are those that don’t have any income taxes for residents or nonresidents. States are most likely to enforce their taxes against someone who only worked there for a few days if the taxpayer is high-income.

People can typically claim a credit for taxes paid in other states on their returns for their state of residence. However, those credits don’t necessarily fully offset the taxes that were paid elsewhere, and in some cases people may not get any credit.

The challenges for employers and employees caused by the lack of standardized state tax rules predate the pandemic, but the coronavirus has increased the number of people impacted by the complexity, since many people are not working from their regular offices in order to help reduce the spread of the virus.

“It’s now affected a lot more people, because there’s a lot more people working remotely now,” said Eileen Sherr, senior manager for tax policy and advocacy at the American Institute of CPAs (AICPA).

According to the AICPA, some states have issued guidance that allows people who are working remotely because of the pandemic to continue to have taxes withheld based on the state where their employer is located, rather than to the state where they are temporarily working.  However, most have not done so.

Tax professionals and lawmakers are worried that without congressional action, many taxpayers could be confused about how to file state tax returns next year. In some cases, they may mistakenly fail to file taxes in multiple states when they need to do so. In other circumstances, they may be hit with unexpectedly high tax bills when they learn they need to file returns in multiple states.

Stakeholders said some people might end up paying more in taxes than they otherwise would have because of the changes to their work locations — such as if a health care worker from a state without income taxes went to New York to help combat the virus. Experts also said that in some cases, taxpayers who work remotely from a state outside of where their office is located could have the same income taxed twice by two different states.

Lawmakers have worked on bipartisan legislation for a number of years to standardize state tax rules for remote workers. The House has passed legislation in previous years that would require an employee to work in a state for more than 30 days before the state can subject that worker’s wages to its personal income taxes. The measure most recently passed the House in 2017 by voice vote but didn’t get taken up in the Senate.

Thune and Sen. Sherrod Brown (D-Ohio) introduced an updated version of that legislation in June to address some of the particular state tax challenges resulting from the pandemic.

In addition to including the general 30-day standard, workers who traveled to a state outside their home state for employment because of the pandemic could not be subjected to that state’s taxes for 2020 unless they were working in the state for more than 90 days. The bill also would allow employers to treat their remote workers’ income as earned at its normal work location until either 90 percent of the company’s workforce returns to the worksite or the end 2020, whichever comes sooner.

“It’s critical that Congress provides tax certainty going into the next filing season, for workers and employers,” Brown said in a statement to The Hill. “If we don’t, workers could have a surprise tax bill in store just because they worked in a different state than usual during the pandemic.”

Thune and Brown’s bill has the support of a number of groups representing businesses and tax preparers, including the AICPA, the Council on State Taxation (COST), the U.S. Chamber of Commerce and UPS.

The provisions in the bill were incorporated into a coronavirus relief package that Senate Republicans proposed in late July, though they were not included in the slimmed-down proposal Senate Republicans put forward earlier this month.

Andrew Moylan, executive vice president of the right-leaning National Taxpayers Union Foundation, said the inclusion of Thune and Brown’s bill into the broader relief proposal is “helpful and an important sign that people in leadership are paying attention.”

Thune holds the second-highest position in the Senate GOP leadership team.

But it’s unclear if or when any type of coronavirus relief package will be enacted, since Democrats and Republicans are far apart on the overall size of a bill. It also remains to be seen whether the provisions in Thune and Brown’s bill will find their way into a COVID-19 measure that’s the product of negotiations between Democratic and Republican leaders.

Verenda Smith, deputy director of the Federation of Tax Administrators, said state tax agencies haven’t raised objections to the coronavirus-specific parts of the bill from Thune and Brown so long as there is an expiration date, but they have concerns with the portion that creates the general 30-day threshold. She said it would be better for states to each pass their own laws setting thresholds, and in some cases the bill would prevent states from taxing nonresidents who made a lot of money in the state in a short amount of time.

“There’s a huge difference between a federal preemption and a state passing its own law,” Smith said.

Supporters of the bill suggested that Senate Minority Leader Charles Schumer (D-N.Y.) could pose an obstacle, since New York benefits from the current state tax setup and is among the states that most aggressively taxes nonresident workers. In May, New York Gov. Andrew Cuomo (D) said he would not waive state taxes for health care workers who temporarily came to help treat coronavirus patients because the state has a budget deficit.

Schumer’s office did not provide a comment to The Hill.

Doug Lindholm, president and executive director of COST, a state tax organization representing businesses, said he hopes the remote and mobile workers provisions make it into a coronavirus relief package negotiated by Republicans and Democrats, and that “Schumer will acquiesce if the bill is good for New York as a whole.”

However, Brian Kirkell, a principal in the Washington national tax practice at RSM, an audit, tax and consulting firm, expressed skepticism that legislation on mobile and remote workers would pass this year, noting that the predecessor bill has languished for years.

“I think it’s very unlikely,” he said.

Tags Andrew Cuomo Charles Schumer Coronavirus COVID-19 John Thune remote work Sherrod Brown state taxes taxes work redefined

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