The bottom line is this: the state where your office is located is the state to which you pay taxes, not the state in which you live. States are looking for tax revenue and are not anxious to give up any of it, and will tax you based on the state where you work.
This issue has gained ground since the COVID pandemic, when so many people began working from home or other locations than the company office.
When you pay income tax to a non-resident state, you receive a credit from your home state for that tax amount you paid on income earned in the non-resident state. For example, you are a North Jersey resident who commutes into NYC for work. You pay New York State taxes and the State of NJ gives you a credit on your tax return for the New York taxes paid on that income.
Work-from-home tax matters
What if you’ve always worked from home for an out-of-state employer and have never gone to that employer’s office? You will likely only pay taxes to your home state. However, this might not always be the case. It may vary from state to state. And it depends on the facts and circumstances.
For example, New York State has a tax law that refers to a place of work “for the convenience of the employer.” This refers to your work location as being for your employer’s convenience—not because you don’t want to commute or have decided due to COVID that you prefer to work from home.
If you live in New Jersey and your work/office situation aligns with “the convenience of your employer” who is based in New York, you will have to pay New York taxes. This is the case in several other states.
State taxation complications and withholding considerations
Today’s hybrid work model, where employees are working some days from home and coming into the office other days, creates a complication regarding state income tax. There are also a couple of scenarios in which you may be able to “allocate out” your withholding from the employer’s state where the business is located to your domicile state.
Additional complications arise for highly compensated individuals who have a second home in the employer’s state and spend time there—even if it is for leisure and not for work.
Scenario 1: Your employer has an office in your home state—even if you are not working on site. If so, you should talk to your company’s human resource director about changing your withholding to be allocated to the home state office. You’ll need to confirm if your employer will allow you to change your tax withholding to your home residence state.
Scenario 2: If you travel a lot for business, and can show you are neither working from home nor from the employer’s location (you are working in multiple locations for the employer), you may be able to allocate the income to various states. Due to the complexity of this situation, we advise you to keep a diary of where you are working. Be aware that the state can audit your expenses and your business calls to determine where you actually work. Remember, states are looking for money and are not anxious to give up any tax revenue.
Scenario 3: You live in northern NJ, have a NY employer, and make enough that you also own an apartment in NYC, a nice little crash pad for when you go in for dinner and a show. New York law states that if you spend more than 180 days at that residence (as an owner or renter), you are considered a statutory resident, which may trigger a NYC tax event. In short, a day of leisure counts as a day of living there. This can become very expensive as you may end up paying both New York City and New York State income tax.
Similarly, as we saw during COVID, people fled to their out-of-state vacation homes to ride out the pandemic and work remotely from there. Depending on the state where that second home is located will affect your state tax liability.
Scenario 4: In the event your employer’s location is inaccessible due to natural disaster or other significant event, and you are forced to work from home, you should continue paying taxes to the employer’s state to avoid any problems.
NOTE: One reason why it is important that you pay income tax to the correct state is if you need to claim unemployment or disability, which comes from the state’s coffers where the employer is based.
At Scheidel, Sullivan & Lanni CPA, we also advise our clients to come in for a tax planning meeting to discuss this matter to make sure you are paying income tax to the correct state.
Home office tax deduction – yes or no?
A question often asked by clients is if they qualify for a home office deduction if they are working from the house. Anyone who is a W2 employee is not entitled to a home office deduction; it is only for the self-employed and independent contractors.
The tax team at Scheidel, Sullivan & Lanni CPA is here to provide guidance on all tax matters. Contact us at [email protected] or 201-236-2226 to arrange a consultation about your tax situation.