At long last, Congress appears to have reached the point of serious negotiations on an end-of-year relief package, with compromises made on business liability shields, state and local funding, and individual aid checks. But no matter what direction the negotiations take, Congress must be certain to include a commonsense fix to the tax treatment of remote work.
As a result of the pandemic, millions of Americans have followed public health guidelines and worked from home when possible. Many had little choice in the matter, forced to work remotely for a time due to state lockdowns.
Americans dealing with the many challenges the pandemic has brought on, as well as the transition to working remotely, likely spent little time thinking about their taxes for tax year 2020. But that doesn’t mean state revenue departments plan to cut them any slack.
That’s because working remotely can result in substantial changes to Americans’ state tax filings. Every American taxpayer who has spent time working remotely in a different state than their normal office location can see their tax liability change significantly, and is expected to have tracked what days were worked in what state.
That can lead to unwelcome tax hikes at a time when many Americans are ill-prepared to take on new tax expenses. Cross-state commuting Americans who previously enjoyed the benefits of having their income be subject to one of the nine states with no income tax could, in particular, be in for a nasty surprise come next April.
And it’s not just people previously paying no income tax who could be hit with an unwelcome tax hike. Six states enforce a “convenience of the employer” rule, whereby employees who switch from working in an in-state office to working remotely in another state are still subject to that state’s taxes unless they absolutely had to be working remotely. This can result in employees being taxed twice on the same income by two different states.
Take an essential business in New York, a convenience of the employer state, that allows its employees to work remotely for their safety. If that employee switched to working remotely in their Connecticut home, they could be taxed by both New York and Connecticut on any income earned during that period.
The National Taxpayers Union Foundation calculated the impact this would have on a hypothetical HR assistant making the mean salary for such roles in New York of $42,620. As a result of working just nine months remotely in Connecticut, this unfortunate employee would face a total state tax increase of $1,397. For this person, a Congressional remote work fix would do more for their financial situation than the $1,200 check from the last major COVID relief package did.
And many affected employees may not foresee the impending tax increase. A survey by the American Institute of Certified Public Accountants found that 71 percent of Americans working remotely were unaware that this could impact their tax liability.
Fortunately, a fix by Congress is easy and would cost the federal government nothing. Since the beginning of Phase Four negotiations, Republicans have pushed for a fix based on bipartisan legislation that would clarify tax treatment of remote work in order to avoid nasty surprises. There is absolutely no reason why this fix should not be a part of the final relief package.
As the eleventh hour negotiations continue on, fixing the tax treatment of remote work should be the one thing which is not up for debate. There’s simply no more cost-effective and simple way to help out American workers during this pandemic.