That scream you hear? It’s the sound of every accountant who’s been asked by a client about how to deal with the crazy remote working arrangements wrought by the pandemic. Even tax authorities are not in agreement about how people ought to file in today’s still-quarantined world.
The questions taxpayers are asking fall into three major types of buckets with some variants:
- I work in New York but have lived this past year in Connecticut. Do I still need to pay New York State taxes I haven’t been to my office in a year.
- I spent $5K on a spruced-up home office. Can I use it as a deduction?
- I worked remotely from (name your exotic location) this year. Do I owe taxes, and where?
Freelancers, self-employed contractors, and gig economy workers are all a bit more comfortable with the work-from-anywhere drill. They are entitled to take a deduction on a home office. But now you’ve got a huge population of W-2-toting work-from-home newbies who are unprepared for the new rules of the road.
These issues confront companies and employers as well. “In the beginning,” said David Lewis, CEO of Operations, Inc., a human resources consulting firm, “employers saw this coming at them from two directions. They had employees who decided to get out of Dodge and move to another city or state. Then there were those firms who saw an opportunity to hire talent from all over the U.S. vs. just those in a commutable distance to their offices. In both scenarios, you will now have work being performed in locales other than where your business has been operating. How does that affect your firm? In short, it is complicated.” For employers, there may be the need to register in each new place where work is being performed, and even the need to file taxes in those places.
I suspect that most employees did not have tax season issues at the top of their minds back at the start of lockdown. They may have forgotten to ask their employer for permission to deduct necessary new equipment purchases. I gave my own accountant, Eric Levine, a call. He’s never loved tax season but describes this one as a “cluster &^%^,” adding that not a day goes by without a client wanting to deduct their work-from-home expenses. “The prudent thing to have done,” he says, “was to ask your company for reimbursement before your purchase. Tax deductions for home office expenses simply don’t apply to W-2 workers.” You can thank changes made to the tax code in 2017’s Tax Cuts and Jobs Act for that. Levine adds another caution. Even for freelancers and contract employees, there is the concept of “exclusive use”, when you need to prove that your home office is not doubling as the kitchen table.
While tax deductions for home offices are pretty well spelled out, however painfully, the answers about paying taxes where you work or live are considerably murkier. Consider this. Upwards of 55% of the population worked remotely during the pandemic. But according to the AICPA survey, 7 out of 10 Americans did not expect to owe taxes in the states where they have been working. A rather shocking 47% were not aware that each state has its own tax laws related to remote working. The number of days anyone worked in another state could impact the taxes they owe. Surprises could take the form of new tax obligations in the state where you’ve been living in or a need to file in multiple states, as each state has differing rules regarding residency and state income tax.
“People working remotely need to talk to their tax accountant as soon as possible. They need to keep good records and proof of where they were and when. That’s especially true for the many people who have been working remotely from a different state (or multiple states) than their usual tax residence, particularly given the length of time that they have been working remotely,” says Helena Jonassen, who is partner, wealth and fiduciary advisor at Evercore Wealth Management.
Keep your financial planners on speed dial. (Sending a bottle of wine may help, too.) The situation is still very fluid. “Some workers intend to continue to work remotely and have decided to change their residence to the new state, which requires careful deliberate action to terminate your ‘domicile’ with your former state and establish ‘domicile’ in the new state,” Jonassen continued.
It would be easy to blame employers for not spelling out the situation way back last year. “But”, reminds David Lewis, “at the time COVID hit, no one was in a planning or forward-thinking mode, given it was so unprecedented and unclear as to how long this would last. To further complicate things, the rules of the road are very unclear, making it difficult to near impossible for an employer to precisely educate their employees on possible tax implications. Even as this remote arrangement went on for month after month, employers did not have a clear mandate or a clear message for their employees.”
Compounding this lack of guidance from employers is the patchwork quilt of state tax regulations. Some states already have reciprocity or tax credit rules in place to accommodate workers who live and work in different states. Already states like New Jersey, New Hampshire, and Michigan are involved in litigation over who owes which taxes and where for 2020. For example, New Jersey’s legislature argues that its residents who work in NYC have not been there in a year and thus should not be responsible to pay state incometaxes there. New Hampshire has already sued Massachusetts over a pandemic-inspired law that subjects New Hampshire residents whose employer is in Massachusetts but who have lately been working at home to Massachusetts income tax anyway. That case is already at the Supreme Court, and at least 11 other states have filed amicus curiae briefs.
“Seeking professional advice is critical,” reiterates David Lewis for pandemic-concerned taxpayers. “But a word of caution: Don’t expect clear answers…yet. This is a new frontier, and the likelihood is that the US Supreme Court will be involved in deciding the rules of the road, but maybe not until 2022.” The pandemic might have created the immediate issue, but as companies like Salesforce and Spotify announce their work from anywhere initiatives and as digital nomads are being courted to work from exotic locales, updated tax laws that address a new generation of worker need to be created.