Multi-State Worker Tax Considerations

AAFCPAs would like to make clients aware that Congress has introduced a bill under H.R. 7968 that would limit a state’s ability to tax nonresident telecommuters. The general rule is that an employee pays income taxes to the state where wages are earned, which can be different than the state where the employee lives. This occurs if the employee commutes across state lines, or travels for work. As a result of the COVID-19 pandemic, many multi-state workers are now working from home, and not travelling across state lines for work.

States such as Massachusetts have passed emergency regulations (Mass. TIR 20-5 Massachusetts Tax Implications of an Employee Working Remotely due to the COVID-19 Pandemic) to address the personal income and withholding tax obligations for non-resident employees working from home as a result of COVID-19. Massachusetts has asserted that non-resident employees whose normal work office is in MA will continue to be subject to MA income tax while the COVID-19 state of emergency is in place in MA. In return, MA will not challenge other states that continue to impose income tax on MA residents who previously commuted out of state for work and are now working from home.

For a state such as New Hampshire, whose residents are not taxed on the wages they earn, this treatment is considered unfair. NH argues that an employee should only be subject to tax under the laws of their home state when they telework. NH is reviewing whether it will take judicial action against MA in this instance.

Of note is that 6 other states (Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania) have rules subjecting non-resident employees to income tax under “convenience of employer” rules. For example, a resident of Missouri who works remotely for an Arkansas-based employer would be subject to Arkansas income tax on those wages, unless an exception to the convenience rule was met. These states have not provided additional guidance related to the COVID-19 pandemic.

Employers with multi-state workers (employees who live in one state but commute to a different state for work, or who work remotely from a different state then the location of the company office), and employees who are considered multi-state workers are encouraged to contact your AAFCPAs Tax Partner to ensure compliance with state payroll sourcing rules.

AAFCPAs continues to monitor ever-changing developments in state and local taxation, including their impact on US tax code. If you have questions, please contact: Dan Cahill, CPA, at dcahill@nullaafcpa.com, 774.513.0551; or your AAFCPAs Partner.