Due to the increase in remote work and telecommuting since the start of COVID, more people than ever are working from home in one state even though their company is located in another. This can lead to complicated tax issues, but with a little extra knowledge (and the help of S.H. Block Tax Services), you can get the most out of your out-of-state remote work tax return.
Keep reading to learn how!
The Basics of Out-of-State Tax Filings
While remote work has become more and more common during the digital age, working from home across state lines has greatly accelerated during the COVID-19 pandemic, and will likely continue to do so for the foreseeable future. As such, taxpayers need to adapt to this new paradigm and think smarter about how the remote work model affects their finances, especially their tax filings. Most especially, you need to consider the tax implications of the state in which you live and the state in which you work.
Who’s Considered a Remote Worker?
Depending on your work status, your company, and each state’s tax laws, you might need to pay taxes in the state(s) in which you work remotely (in addition to the state in which you live) — known as the nonresident state.
A nonresident state is a state in which the taxpayer earns income but has not lived in for at least the previous tax year. If you list a nonresident state on your W-2, you are required to file a nonresident state tax return in the relevant state(s).
Everyone who earns an income must file a resident tax return in their home state, regardless of where their employer(s) is located. This is true for in-office and remote workers — whether you’re a full-time employee or a self-employed freelancer working on a contract basis.
However, please bear in mind that not all people who are currently working from home are considered “remote workers.” For example, telecommuters who live in-state and occasionally work on-site aren’t typically considered remote.
Related Content: Do I Need to File a Nonresident Income Tax Return?
Remote Work Tax Credits and Exceptions
Thankfully, in most instances, just because you have to file taxes in two different states doesn’t mean that you have to pay twice as much. Usually, a remote out-of-state worker can receive a tax credit from their home state to avoid being double taxed. However, that tax credit is usually limited to the relevant state’s income tax rate.
In Maryland, the tax rate begins at 2% for the first $1,000 of taxable income and increases up to a maximum of 5.75%, but nonresidents are charged a special tax rate of 2.25% on top of the state rate.
Unfortunately, several states are double-taxing nonresident workers despite the COVID-19 pandemic in rejection to the “Convenience Rule,” which only taxes nonresidents who are working out of state based on personal convenience rather than necessity. These states include:
- New Jersey (applied on audit)
- New York
States That Do Not Charge Income Tax
On the bright side, if you work in any of the following states, you are not required to file a nonresident tax return and will not be charged income tax for work completed in that state.
- New Hampshire
- South Dakota
Even though these states are income-tax-free, residents must still file a tax return each year. Further, just because you live in one of these states doesn’t mean you don’t have to file a tax return in the state in which you live.
Reciprocal Tax Agreements
Some states have what are known as reciprocal agreements with neighboring states, which are put in place to minimize double taxation for nonresident employees and eliminate excess paperwork and bureaucracy.
For example, people who work in Maryland but live in the District of Columbia, Pennsylvania, Virginia, or West Virginia are not required to file a nonresident state tax return in Maryland. Simply complete Form MW507 and submit it to your employee to enter the program and become exempt from double taxation.
File Your Out-of-State Tax Returns With S.H. Block Tax Services
At S.H. Block Tax Services, we have extensive experience helping individuals with nonresident returns and other complex tax situations. Even before the COVID-19 pandemic we worked with thousands of out-of-state remote workers, helping them minimize their tax liability and avoid trouble with either state governments or the IRS.
To learn more about S.H. Block Tax Services or schedule a bookkeeping consultation, please call (888) 884-8686 or complete this brief form today.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.