Work from home makes for taxing question

States wrestle with how to tax people employed in one state but working from home in another
Credit: joey.parsons via Creative Commons under CC BY-ND 2.0
Working remotely

While it has drawn far less attention than the health crisis itself, a major issue has emerged for many people during the coronavirus pandemic: Where do you owe taxes when working from home instead of in an office every day?

New Jersey has already signed onto a high-profile court case that seeks to prevent states like New York from aggressively taxing nonresidents who work remotely and end up spending little to no time at all in the states where their employers are located.

And just in time for this year’s delayed deadline for submitting income-tax returns — Monday for those who have yet to do so — two New Jersey lawmakers recently crossed party lines to work on a separate push to enact new tax policies at the federal level to hold the line on aggressive out-of-state taxation.

To be sure, the bistate tax battles have come to a head during the pandemic because many were forced to work from home for much of the last year as a public-health precaution, raising questions about where they actually “earned” their income during the 2020 tax year.

But the underlying tax-policy issues are also not expected to go away once the health crisis is over. Remote work is now being taken more seriously as an option by both employers and their workers, and it is expected to play a bigger role in the post-pandemic economy.

The stakes are also higher than ever for state budgets that rely heavily on income-tax revenue since many companies have already started looking for new workers as economic restrictions are being lifted, seemingly by the day.

“If there ever was a time to fight back against New York’s unfair taxation of New Jerseyans, it’s now,” said state Sen. Steve Oroho (R-Sussex), one of the lawmakers who’s repeatedly called for new tax policies in recent months.

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No reciprocal tax pact with New York

New Jersey has long maintained a reciprocal agreement with neighboring Pennsylvania that lets commuters and telecommuters in each state pay income taxes where they live and not where their companies are based.

But no such pact exists between New Jersey and New York, even though there are thousands of residents who work for companies that are based across state lines.

Moreover, officials in New York have consistently viewed the remote work performed by employees of New York-based companies — even during the COVID-19 lockdowns — as a “convenience,” thus permitting the workers’ income to still be subject to New York’s tax laws.

While New Jersey’s own tax laws generally dictate that income is “sourced based on where the service or employment is performed,” New Jersey’s Department of Treasury, to prevent double taxation, has traditionally provided offsetting tax credits to its residents for income taxes paid to New York. And that’s occurred even during the last year, whether workers actually earned income in New York or not.

But Gov. Phil Murphy’s administration has taken some steps to fight back.

Last December, New Jersey Attorney General Gurbir Grewal filed an “amicus” brief in an ongoing legal battle over similar state taxation issues that is currently playing out in the U.S. Supreme Court between Massachusetts and New Hampshire.

An issue of ‘nationwide importance’

While it’s unclear whether the high court will ultimately take on the case, Grewal has called the issue one of “nationwide importance.”

And Murphy just brought up New Jersey’s participation in that case last week when he was asked about New York’s ongoing push to establish a system of “congestion pricing” that could further increase costs for New Jersey residents.

Murphy said his administration is not taking these issues “lying down,” and added it “doesn’t make a whole lot of sense” for New York to tax the income of New Jersey residents if “you’re working from home in New Jersey.”

The ongoing push for a legal remedy to the tax issues related to remote work has also come up during recent budget hearings after the Murphy administration estimated as much as $1.2 billion will be paid out in tax credits to residents who worked from home in New Jersey last year but paid income taxes to New York.

“If we were to stop providing that credit — and New York isn’t backing down on what they feel they have the right to charge — our residents will be paying twice, essentially, until it can be worked out in the courts,” state Treasurer Elizabeth Maher Muoio told lawmakers during a recent budget hearing.

Still, some lawmakers have been calling on the Murphy administration to take a more aggressive posture with New York and Gov. Andrew Cuomo.

Funding public education, property tax relief

They’ve noted the new income-tax revenue that could be collected by New Jersey’s Treasury if a shift in tax policy occurred would be constitutionally dedicated to funding public education and direct property tax relief — two areas of the state budget that right now are not being funded up to statutory levels.

“It goes into our Property Tax Relief Fund, which funds K-12 education, our Senior Freeze program, our Homestead rebate program,” said Oroho, who serves on the Senate Budget and Appropriations Committee.

“I just hope that we’re not just waiting for this court decision,” he said.

Even before the onset of the pandemic, some federal lawmakers had introduced legislation to simplify tax issues for remote workers and states. Their proposal calls for allowing most remote workers to pay income taxes in their home states, unless they spend more than 30 days working somewhere else.

However, that effort appears stalled amid the broader political gridlock that has gripped Washington, D.C.

Last month, Oroho and U.S. Rep. Josh Gottheimer (D-5th) launched a separate effort that seeks to bring about new administrative federal tax policies to govern the taxation of remote work. They sent a joint letter to the heads of the U.S. Treasury and the federal Internal Revenue Service that calls for new administrative guidance to establish a nationwide fix.

The two lawmakers noted that in addition to determining whether states should collect income-tax revenue from nonresidents, the residents themselves could also have much at stake.

Possible savings paying NJ state taxes  

For example, due to differences in the way New Jersey and New York levy income taxes, many New Jersey residents could realize tax savings if they were able to pay income taxes to New Jersey instead of New York, the two lawmakers said.

But in their letter, they also pointed to what’s expected to be a long-lasting labor trend, one that will see companies providing more ways to allow their employees to work from home to remain competitive in a tightening labor market.

“For many of our constituents, given modern technology, this shift to working from home may become a permanent arrangement with their employers,” the two lawmakers said.

“Until a permanent statutory fix is signed into law, federal guidance would provide significant fiscal certainty and relief for residents in states like ours,” they said.

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