Double trouble: Will clients have to pay taxes in two locations?

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“Catastrophe” they say, and “Disaster waiting to happen” as the time eventually nears to file 2020 taxes.

The pandemic has sent legions of workers — and tax clients — nationwide to a work location other than their business. These remote workers are now beginning to wonder if they’ll have to pay income tax to more than one jurisdiction and how long it will take to get such a mess eventually cleared up.

Good question, say some preparers. States use several factors to decide whether a taxpayer must include income for taxing in that state, including nexus, domicile and residency. Some hold reciprocal tax agreements with neighboring states and others have actually begun issuing nexus guidance and relief measures. Next year’s W-2s may not look like any in recent memory, as many states take a stab at withholding.

“Thankfully, in the D.C. Metro area we already have interstate agreements where payroll withholding is based on state of residency and people are able to cross state borders for employment without tax implication,” said Lori Roberts, a CPA and director of state and local taxation for Top 100 Firm PBMares in Fairfax, Virginia. “But this only protects employees and their W-2 earnings. We are cautioning clients that they will need to work within state tax laws to determine nexus triggers for their business activities.”

“My clients working from home are being advised to exercise patience — and hope that their taxing authority [refrains] from exercising nexus statutes,” added Enrolled Agent John Dundon, president of Taxpayer Advocacy Services in Englewood, Colorado.

Absent real state legislation or clear guidance (“scarce and inconsistent,” as one CPA described it), employees working from home could trip nexus in the employees’ state of residency for the employer, potentially requiring the employer to file and pay tax in additional states, according to Roberts at PBMares.

No hopping off

The filing situation ahead will be complicated not only by a mish-mash of states’ rules regarding nexus but by companies slowly reopening and sending workers back to offices on scattered schedules to ensure social distancing.

“Once nexus is created with a state, the taxpayer will likely need to register to do business in that state and will be subject to the various state tax return filing requirements,” reads a recent “Tax Warrior” blog from the Philadelphia firm Drucker & Scaccetti. “Each state has different nexus standards and within a state there may be different standards for different types of tax … An employee working in a state typically creates nexus for the employer in that state for both sales tax and income tax.”

PBMares’ Roberts also reports inquiries about people working from their vacation homes. “Such situations could impact not only the employer but the employee, as they will have taxable income in their home state and their vacation home state,” she said.

“Taxpayers shouldn’t think that they can hop off to their second home in a state with no individual income tax and think they can assume part-year residency in their state of domicile and avoid state tax. The home state will presume that all income is taxable in the state of residency/domicile, and only if income is double-taxed to another state will the taxpayer be able to receive benefit in their home state through other state credits,” Roberts said.

“Even if an employee is working in a state that has issued a ‘nexus waiver’ during the pandemic, that waiver may only be valid during a government-mandated shutdown. As businesses reopen, a nexus waiver may no longer apply,” the “Warrior” blog adds.

Location, location, location

“The Tax Warrior” advises all businesses to revisit teleworking policies and consider:

  • Are employees allowed to work “anywhere” or can they only work in their state of residency?
  • Do employees use employer-owned property in their home offices?
  • In which states are the employees currently working?

Solid documentation is another wise defense — including correcting employees’ addresses of record to reflect working from home — as is ensuring adequate withholding for the correct state.

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Work from home Coronavirus Tax returns Tax nexus