Tax Implications for Remote Workers

by: Matthew Petrouskie

From the onset of the COVID-19 Pandemic, Americans have largely embraced the exodus out of the traditional office space. Remote working has created a unique opportunity to get the job done from anywhere in the country or even anywhere in the world. However, certain states such as Massachusetts has implemented a policy that taxes income for workers employed in their state who are physically based elsewhere. Such a policy raises the question as to whether states are empowered to tax non-residents employed with in-state businesses.

In April of 2020, Massachusetts instituted an emergency tax policy where nonresidents employed in the state would still be liable for 5% percent of their income. Additionally, Massachusetts’ new tax policy contrasts with the majority of states’ own policy on income earned. Most states only tax income that has been earned within their borders. Furthermore, some states do not even levy their own income tax. New Hampshire is one of such states.

Consequently, New Hampshire, a state where many of its residents are employed for businesses in the Bay State, sued Massachusetts in October 2020 for what it views as an encroachment on its sovereignty. New Hampshire Governor Chris Sununu has labeled Massachusetts’ tax policy as unconstitutional because it charges a tax burden on individuals outside of the Bay State’s jurisdiction.

Additionally, New Hampshire has filed the suit with the Supreme Court, the only judicial body in the United States with the power to hear matters between two states. Normally, the Supreme Court only hears cases between states that deal with issues of high importance. However, the tax issue inherent to this case could not be of higher importance, especially as the COVID-19 Pandemic continues to reshape the needs of employers and the workforce at large.

While the vaccination rollout campaign appears promising, a return to the pre-pandemic workplace should not be considered a guarantee. Keeping employees working remotely might be better suited for management in certain industries. Moreover, workers might not be immediately ready to return to a physical office due to health and safety concerns. Regardless of the fact, the COVID-19 pandemic has irrevocably changed the dynamic of the American office space. The Supreme Court’s decision on this case will unquestionably set a precedent as to the tax implications of this altered workplace dynamic. Should the court rule in favor of New Hampshire, the shift to working remotely could become a much more permanent feature of American society. Conversely, should the court rule in favor of Massachusetts, the rapid change towards working from home, wherever home might be, could be undone just as swiftly. With a ruling in favor of Massachusetts, workers could be trapped in the state in which their companies are based.

Employers should consult with their labor counsel and tax preparers to ensure they do not run afoul of state income tax laws.