By William R. Stromsem, CPA, J.D., Assistant Professor, George Washington University School of Business
In COVID-19 times, many workers have been free to work from remote locations, and those working from their homes in Texas often believe they do not have to pay income taxes to other states where they would regularly work in an office. Remote workers who perform work most of the time in Texas are generally not required to file taxes in the other state where their office is. However, not all who work from home are considered remote workers by state nexus laws. Generally, if the expectation is that the worker will return to their out-of-state office when the flexible COVID-19 teleworking rules phase out, then the employee may not be a remote worker and may be required to pay taxes in that state.
States that are losing revenue from employees who claim to have worked in a lower-taxing state like Texas may be subject to state audits, with California and New York, for example, carefully reviewing high-income individuals who changed their tax residence.
This area can be complex and to avoid penalties, practitioners with remote workers should advise clients on the nexus rules where the worker’s physical office is located. Employees may wish to ask employers to not withhold taxes in other states where there are offices, and this may or may not be available depending on the employer and the state. However, if there are not any withheld taxes, the taxpayer can avoid having to file a return to claim a refund, a claim that might trigger a careful review of the worker’s situation.
Shortly after this blog was posted, the U.S. Supreme Court ruled that Massachusetts can tax the earnings of a worker who normally worked in that state but who lived and worked in New Hampshire (a state that does not tax income) during the pandemic. This means that the caution in the blog is valid--that if an employee who worked in Texas during the year but is expected to return to work in the other state, then he/she is not a "remote worker" and can be taxed by the other state.