The Convenience of Employer Rule: Tax Implications of Working Remotely from Another State
John F. Dennehy Jr., CPA, PC

The Convenience of Employer Rule: Tax Implications of Working Remotely from Another State

Amid the global pandemic, the face and nature of work quickly evolved from in-office to a work-from-home, remote employment landscape. While the new arrangement offers a number of key benefits — including convenience — these benefits are coming at a tremendous cost. 

Remote workers in New York and the surrounding states may be subject to double state income tax taxation. Let's take a deeper dive into the subject surrounding state tax implications of working remotely from another state.

Remote Workers, Convenience Tax, and Tax Liability

As a general rule of thumb, workers are required to pay state income taxes to the state they reside in. This tidbit can offer significant advantages to workers who live in a large city and want to migrate to a rural area or another state with lower or no state income taxes.

For instance, someone who works and lives in the Washington D.C. area will pay a maximum individual income tax rate of 8.9%. If this worker decides to relocate to the sunny state of Florida, where there is no state income tax, the worker could avoid state income taxes altogether.

However, as remote work increases in popularity and workers migrate, it's causing states to lose significant income tax revenue. It has resulted in changes to tax codes. 

Some remote workers could end up paying an income tax in two states, which means doubling their personal income taxes for the state. Remote workers whose organization of employment is based in certain states may owe taxes in the state the company is in and their state of residence because of convenience rules.

What Is the Convenience of Employer Rule?

In most states, when an employee works remotely for a business in a different state, they would only be responsible for paying taxes in their resident state. However, because of the emergence of telecommuting and remote workers, several states have adopted the Convenience of Employer Rule (COE).

This rule is designed to help regulate income tax withholding. However, it often results in remote workers paying double state income tax rates, which can mitigate the benefits of working remotely.

Under the Convenience of Employer Rule, a remote worker who earns wages from a business located in one state could be on the hook for paying taxes in the state of the employer's office as well as their own.

As a result, employees that work remotely for business in a convenience rule state could be subject to double taxation:

  1. The employee would have to pay the state income tax rate where the employer is situated.
  2. If the employee's residence state has taxes in the tax code, they must pay income taxes there as well.

What Are the Convenience Rule States?

Multiple states have adopted this rule that heavily impacts remote employees. The five states are:

  • Arkansas
  • Delaware
  • Nebraska
  • New York and
  • Pennsylvania

At the same time, two additional states use a variation of the rule for tax purposes: Massachusetts and Connecticut.

Connecticut's Convenience of the Employer Rule

The state of Connecticut has adopted a tax policy that requires employees in the state to pass the Convenience of the Employer test only if the employee's residence state applies similar tax laws for work performed for a Connecticut employer. 

However, if the other state doesn't apply the Convenience of Employer test, Connecticut doesn't apply it for those who have worked remotely.

For example, if you are a resident of New York and have worked remotely for Connecticut employers, you will qualify under the convenience rule because New York has implemented the rule.

Massachusetts' Convenience of the Employer Rule

The state of Massachusetts typically taxes nonresident workers on the wages they earn while in the state. However, the COVID-19 pandemic has prompted the state to implement different laws that resemble other states.

The new regulation temporarily employs the Convenience of Employer rule only for workers who telework because of the pandemic. As a result, any nonresident workers of businesses based in Massachusetts that perform remote work in different states because of pandemic-related reasons are liable to double taxation under the state's own tax code.

New Jersey's Convenience of the Employer Rule

Finally, the state of New Jersey tends to apply the Convenience of the Employer rule based on audit — even though it hasn't adopted any formal tax laws or statutes regarding it.

A Quick Look at New Hampshire

Although not all states are in line with the rule, the majority of them are simply waiting to see the end result and will not step foot until things have crystallized. Certain states, like New Hampshire, are taking legal action to make sure this rule doesn't harm the tax apportionment between many states.

New Hampshire has even sued the state of Massachusetts to court over the "unconstitutional extraterritorial assertion of taxing power." Because it's an issue between more than one state, it will most likely require the Supreme Court to decide.

Contact John F. Dennehy CPA for Federal Tax and State Tax Assistance

Whether you're an employer or employee, navigating the complex world of state projects, taxes on the federal level, and local taxes can be extremely difficult and confusing. However, the COVID-19 pandemic has further muddied the tax landscape. 

And if you're self-employed or an independent contractor working remotely and living in a different state or one of the nine states, things can get even more complex. If you're a remote worker who lives and works in a different state, it is increasingly important for you to engage in strategic tax planning with an experienced tax professional. 

Failure to do so could result in shock and awe when you file taxes with a tax professional. Because of this, it's imperative to consult with an experienced tax advisor to understand the full tax consequences of remote work.

Fortunately, the team at John F. Dennehy CPA can help. As experienced tax planning professionals, we specialize in helping individuals, businesses, independent contractors, self-employed professionals, and others with tax planning and tax filing. 

Our goal will be to minimize tax liability and maximize your own tax returns. To do so, we use a host of tax credits and have an in-depth understanding of different state taxes. And we utilize this expertise to help you save time and money.

Contact John F. Dennehy CPA today, especially if you work remotely or are a remote worker who works in a different state..

About the Author John F. Dennehy Jr., CPA, PC

We at John F. Dennehy CPA are a team of certified public accountants who service clients throughout Long Island. The services that we provide are comprehensive, and we can resolve multiple accounting needs for a client.

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