Beautifying Your Financial Picture

Ask an Accountant: Do Teleworkers Pay Tax in Multiple States?

by Darryl Nguyen

Teleworking (or working from home) is increasingly popular in the United States, with around 30 million people working in their home office at least once per week. Unfortunately, as this alternative to the daily commute becomes more popular, teleworkers must consider the tax implications of this work style. If you live and work in different states, you may not realize that you could face a higher tax liability. Find out more here.

Living and working in multiple states

While many Americans live and work in the same state, some people regularly cross the state borders as part of a work journey or commute. What's more, interstate work arrangements do not just apply to truck drivers and traveling salespeople, especially as many large companies now encourage people to work from home.

This work style is more common when your company's premises are in one of the country's large cities. Office space in cities like New York is increasingly expensive, and the daily commute from neighboring areas is often stressful and costly. As such, it often seems convenient for both the employer and the worker to spend a day or more working from home every week. Nonetheless, if you work in a New York office for part of the week and your home in Connecticut for the odd day here and there, you may still have to file two tax returns.

How state tax laws work

Tax laws vary between states, but all tax authorities can charge tax on their residents' income as they see fit. Because of this, in some states, tax laws say that you must pay income tax on your earnings, irrespective of where you are when you earn the money.

This legislation can become problematic if you work and live in different states because the relevant tax laws in each state may differ. For example, some states have laws that charge tax on all income earned through a company based in the state, irrespective of where the employee works. Due to this, it's easy to see how your tax liability could increase because you work in one state and live in another, especially if the boundaries between home and work start to blur.

Of course, part of the problem stems from the complexity of the income tax system, where one state can function so differently from another. For example, Florida does not charge income tax for nonresidents, while Georgia only charges income tax on nonresidents after they spend a certain number of days working in the state. Then you have states like Kansas where you only need to work in the state for one day, and you incur an income tax liability.

Because of issues like these, you may incur higher taxes than other people in your state who do the same work as you. This situation can exist because you work for a company in a state where income tax laws are higher. In effect, you could pay more tax for doing the same job as your neighbor because your employer is in another state.

Dealing with the issue

When you apply for a new job, it's unlikely that you will consider the tax implications that may exist if you live and work in multiple states, but a tax advisor will warn you that you need to rethink your approach.

What's more, before you leap at the opportunity to start working from home, talk to your tax adviser or accountant about the possible impact this decision could have on your post-tax income. Bearing in mind that one day at home in a single tax year could result in two tax returns, a detailed tax discussion could help you more carefully consider your options.

Federal legislators are also keen to address the complexity of the situation. The Multi-State Worker Tax Fairness Act is a bill that aims to standardize the approach to income tax when employees live and work in different states. Nonetheless, earlier attempts to introduce similar changes failed, so it's probably not a good idea to rely on the law changing any time soon.

If you ever work from home, you may not miss the commute, but you could miss the income you lose, thanks to the way different state tax laws work. Talk to a tax planner or accountant for more advice about your options for strategic tax planning.