How to Handle Double Taxation for Remote Workers

The rise of remote work has created complex tax situations for many employees. When a worker lives in one state and works for a company based in another, they can become subject to the tax laws of both jurisdictions. This scenario can lead to double taxation, where two different states assert the right to tax the same income. Understanding the principles of state taxation is the first step for remote workers to comply with the law while avoiding overpayment.

Determining Your State Tax Obligations

State tax obligations are governed by two principles. Your state of domicile, or residency, is your permanent home. States with an income tax claim the right to tax all income earned by their residents, regardless of where it is generated.

The second principle involves source income, which is money earned from work performed in a specific location. States tax non-residents on income sourced from within their borders. If you physically perform work in a state where you do not live, that state can require you to pay income tax on those wages, though some states have thresholds for filing.

These two principles can create a conflict where a remote worker faces tax claims from two states. For example, if you live in State A, it will seek to tax your income because you are a resident. If your work is sourced to State B, it may also claim a right to tax that same income, creating the potential for double taxation.

The Convenience of the Employer Rule

A challenging aspect of multi-state taxation is the “convenience of the employer” rule, an exception to standard sourcing rules. If an employee works from an out-of-state location for their own convenience, rather than as a job requirement, the income is treated as if it were earned at the employer’s office. The employer’s state can then tax the wages, even if the employee never physically works there.

The distinction is between necessity and convenience. If the employer requires the remote work, the income is sourced to the employee’s location. If the employee chooses to work remotely for personal reasons, the income is sourced to the employer’s state. States that apply a version of this rule include:

• Alabama
• Connecticut
• Delaware
• Nebraska
• New Jersey
• New York
• Pennsylvania

For example, a developer in Florida (a no-income-tax state) works remotely for a New York company for personal convenience. New York’s rule would treat the salary as New York-source income. The developer must then file a New York non-resident return and pay state income taxes.

Tax Mitigation Mechanisms

To address double taxation, states provide relief, most commonly through a credit for taxes paid to another state. This credit allows a resident to reduce their home state income tax liability by the amount of tax already paid to a non-resident state on the same income. This prevents the same earnings from being fully taxed twice.

The credit is limited to the lesser of two amounts: the tax paid to the non-resident state, or the tax the home state would have charged on that income. For example, if you paid $5,000 in taxes to a work state, but your home state would have only charged $4,000 on that income, the credit would be capped at $4,000.

Another method is a state reciprocal agreement, which is a pact between states to not tax the wages of residents from the other state. If an agreement exists between your home and work states, you only pay income tax to your state of residence. This eliminates the need to file a non-resident return.

Filing Your State Tax Returns

When filing in two states, there is a specific order to follow. First, file the non-resident state tax return for the state where your employer is located but where you do not live. This step calculates your tax liability in the source-income state.

After completing the non-resident return, file the resident return for the state where you live. You must report all income, including what was taxed by the non-resident state. To avoid double taxation, you will claim the credit for taxes paid to another state on a specific form provided by your home state.

To accurately file these returns and substantiate claims for tax credits, maintain detailed records. This documentation should track where and for how long work was physically performed throughout the year.

The procedure is different if a reciprocal agreement exists between your home and work states. You can request an exemption from withholding in your work state by filing a specific form with your employer. This form certifies your residency and ensures taxes are only withheld for your home state, preventing the need to file a non-resident return.