Employees Stand to Save on Taxes through New Remote Working Lifestyles – Unless Their Employer is a “Convenience Rule” State
Work from home may be convenient for many employees but soon they will be finding that convenience rule tax laws are not. Think you are dodging your high New York State taxes while working remotely as you quarantined with relatives the past three months in Tennessee? Think again.
What Are Convenience Rules?
Six states enforce the income tax “convenience rule” which takes into account where one lives compared to where where one works. The convenience rule states that if a person does not live in the same state as their employer simply out of preference or “convenience” and not because the job requires it, that person will owe income tax to the state where the job is based. So, relocating to achieve a more fulfilling work-from-home lifestyle, may not fulfill your wildest tax reduction dreams if your employer happens to be in Arkansas, Connecticut, Delaware, Nebraska, New York or Pennsylvania.
For example, are you considering working remotely by relocating your family from New York with a top marginal income tax rate of 8.8% to Florida which has a 0% income tax rate? Sorry, but you will still owe New York State income taxes. Unless, of course, you can find a way to argue that your job requires you to be in Florida!
Why Does This Matter?
The lengthy COVID stay-at-home orders has resulted in more employees experiencing the benefits of working from home including no commute time or costs, reduced dry cleaning bills, less expensive in-home dining and more personal and leisure time with family. Several large companies are all-in on the virtues of working from home encouraging their employees to continue to do so through the end of 2020 and even beyond. Companies see that they stand to gain major wins: increased productivity from their at-home workforce, increased access to talent in other parts of the country and even the world, access to less expensive talent saving on headcount costs and the potential to offload expensive real estate rents.
Some big-name examples:
- Google is allowing its employees to work from home through the end of 2020.
- Twitter is offering permanent work from home for employees that are not required to be in the office.
- Dell expects that half of its workforce will remain at home.
- Facebook employees will be eligible for permanent work from home if they are in a role that does not require in-office presence, are experienced and are higher performers. They also plan on building up “hubs” of work-from-home employees in Atlanta, Dallas and Denver.
Employees who have taken to this new world of at-home work are starting to think more long term. Why live in expensive cities like San Francisco or New York if the job no longer requires it? Why not move to a more moderately priced town that offers what may be a more enjoyable lifestyle with outdoor activities, family-friendly environments and less crowds?
The pull becomes even stronger for many Millenials who are developing their careers and starting families. The appeal of reduced living expenses and ability to buy a larger home for less is causing them to rethink their big city requirements.
Taxes – What to Consider Before Relocating to Work Remotely
Before picking up and moving to a new region, it makes fiscal sense to consider the tax consequences of the state where you’re going to and the state where your employer is.
It can get complicated pretty quickly. What if you are working in a state that has an income tax but living in another state that has its own tax? The Maryland v. Wynne 2015 Supreme Court ruling disallows two states to tax the same income. This means that your work state and your resident state can not both assess you – well, sort of.
State Tax Reciprocity Agreements
If the two states have a reciprocal agreement, then you will just pay the income taxes to your resident state.
Reciprocity agreements are typically between neighboring states. Reciprocity allows residents of one state but who live and work in a neighboring state, to not pay the state income taxes where they work. They do, however, have to pay their resident state’s income taxes. Live in New Jersey but work in Pennsylvania? You will pay New Jersey taxes, and not Pennsylvania’s.
If your employer is in a convenience rule state, then you will still have to pay income taxes to that state but your resident state will offer you a tax credit in the amount that you paid to your work state. You may then still have an income tax balance to pay to your resident state. Enjoy filing those tax forms every year!
Want the Best of Both Worlds?
Seek employment out of and move to a no-income tax state. Only seven states offer this residence-friendly benefit: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Keep in mind that these states may have higher than average sales tax or property tax rates so be sure to do your complete due diligence math first.