State and Local Tax Considerations for Remote Employees

When the Covid-19 pandemic started, most businesses went virtual. One of the unintended consequences of this shift is the effect it had—and continues to have–on how and where remote employees pay state and local income taxes. Some states adopted special “Covid-19 rules” that suspended or adapted the way they typically tax remote workers, but those changes are either ending soon or have already ended.

In general, employees who work remotely because of employer necessity are taxed differently than those who are doing so for their own convenience.

Some states have reciprocal agreements stating that employees must pay income tax only in the state where they live no matter whether they are doing so for necessity or convenience. For example, because New Jersey and Pennsylvania have such an agreement, an employee who lives in Cherry Hill, New Jersey and works from home for a company based in Philadelphia would have to pay only New Jersey taxes, and only New Jersey taxes would be withheld from his or her wages.

The tax situation is different if the employee lives in one state and works in a different state without a reciprocal agreement. States that are not a part of a reciprocal agreement usually follow the “convenience of the employer rule.” Under that rule, the employer must withhold state income tax from all wages if the employee spends even one day a year in the state where the employer is located and works remotely the rest of the year in another state for their own convenience.

New Jersey and New York, for instance, do not have a reciprocal agreement, so affected employees would have to file two income tax returns, one for each state. For example, an employee who lives in Suffern, New York and works for a company based in Wayne, New Jersey would have both New York and New Jersey state income taxes withheld from their wages and would have to file income tax returns in both states.

In addition, New York City or Yonkers have their own taxes, so if the employee lived in either of those cities, he or she would be required to pay tax to that taxing jurisdiction as well.

This does not necessarily mean the employee would be double- or triple- taxed. The state in which the employee lives might provide a tax credit for some or all taxes paid to the non-resident state.

The best course of action for taxpayers is to consult their Nisivoccia tax professional so they can be sure to get the advice they need for their specific circumstances. Contact us at (973) 298-8500.