I thought the mantra of “Church Lady” (from Saturday Night Live) was appropriate for today’s post.)
This is an extension of my description of how the COVID-19 quarantine was going to affect a lot of folk’s taxes. And, that’s certainly true.
There’s the domicile rule. Basically, this rule says one is subject to the state income taxes if one resides in the state for 183 days or longer. (Some use 180 days!- which means [you can do the math in your head], it’s entirely possible to owe taxes to two different states in a given year. Even at 183 that can happen- not just during leap year- because the rule is that ANY part of a day counts as a day.)
But, then there are seven states that will make life truly difficult. In the Northeast- Connecticut, New York, New Jersey and Pennsylvania. The other three are Delaware, Arkansas, and Nebraska.
What do these states do? They tax income for telecommuters via what they term the “convenience” rule.
What the heck is the convenience rule? It stipulates that if you are employed by a company in one of these six states and they “let” you work from home- or another location, then you owe taxes to their states, if they are where you are working. If the employer requires you to work in a different location than it’s primary office, then you are absolved from the state’s imposition of taxes.
The real problem (OK, let’s rephrase that- you can bet that New York has a higher tax rate than your state does, which means this is a compounded problem) is that your state of residence probably will NOT give you credit for the state taxes you pay these other states.
Let’s use an example that affected one of our employees. He was working for our New York unit (a corporate entity that was owned and managed by our holding company) and lived in Massachusetts. But, the nature of his job meant he was only present in the State of New York for 102 days a year. (Notice- this is NOT the magic 183 days that makes one a resident of the state.) So, his income was subject to New York State for 28% of his earnings (102/365). And, Massachusetts taxed him on 100% of his income. In other words, he paid a lot of state tax. (If that happened now, he be triply penalized, since only $ 10K of his state/local/property taxes can be deducted on his itemized schedule.
The difference now is that employees are working remotely because their employer’s offices are closed. This was not at “their convenience”.
But, given the fact that New York (and every other convenience state) is starved for cash, you can bet that this little wrinkle will be overlooked. It will take the effort of the taxpayer (and his/her tax advisor) to argue that the order of a Governor to stay home overrules the concept of working from home convenience.
(NOTE: New Jersey specifically altered its laws so that the COVID-19 pandemic overrules the “convenience” tax regulation.)
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Something everyone needs to know.
Thank you, Brenda, for your visit and comment.
This is interesting— I have never heard of the convenience rule.
Thankfully, Marcia, you don’t live in a state that employs it. (Nor does Florida have a state income tax.)
Through no fault of their own – hopefully tax advisors can help these employees. The states, including New York, need money badly but there has to be better ways to get it than taxing people like this, or cutting budgets for agencies who serve disabled individuals (something my developmentally disabled brother in law faces).
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I believe their employers should be providing the advisors- they could engage an advisor to analyze the situation for a slew of employees, provide the guidance, and then have the company link that to their staff. Instead of leaving their employees, who were, indeed, following Governor AND their employer’s guidance- to fend for themselves.