By Zachary T. Payne, CPA
Tax Supervisor
The Covid-19 pandemic has forced millions of Americans to work remotely in the past 16 months. For many remote workers, this has created tax implications, particularly for employees who normally would work in an office in one state but now work remotely from home in another state. Those employees who commuted across state lines pre-pandemic now must figure out which state they owe taxes to.
The impact of this issue has been particularly controversial in Massachusetts and New Hampshire, and the battle is likely to continue since the U.S. Supreme Court has refused to hear a lawsuit filed by New Hampshire.
In 2020, the Commonwealth of Massachusetts enacted a temporary “convenience of the employer” policy. This emergency regulation stated that employees who originally worked in Massachusetts pre-pandemic and are now working remotely in another state are required to continue paying income tax in Massachusetts. This was meant to be a temporary policy.
In October 2020, the State of New Hampshire petitioned the U.S. Supreme Court challenging the constitutionality of the Massachusetts emergency policy. New Hampshire argued that this policy, which state officials say impacts approximately 100,000 residents, is unconstitutional and may have harmful effects on the state if it were to continue permanently. New Hampshire also argued that the policy violates the commerce clause and the due process clause of the U.S. Constitution.
The Supreme Court declined to review the case but the issue will not likely disappear. Tax professionals and government officials in many states are closely watching the MA-NH dispute. Other states have adopted or are adopting similar sourcing rules due to their own declared states of emergency.
The trend of companies adopting permanent remote or hybrid work arrangements post-pandemic, combined with the increasing aggressiveness of states in finding tax revenue where they can, promise to keep this issue front and center for a while.
A resident employee suddenly working remotely in Massachusetts due to another state’s Covid-19 state of emergency, who continues to incur an income tax liability in that other state because of that state’s sourcing rule, is eligible for a credit for taxes paid to that other state under Massachusetts law. In addition, the employer of such an employee is not obligated to withhold Massachusetts income tax for the employee to the extent that the employer is required to withhold income tax for the employee in the state where the employee’s job is based.
We will keep you informed of further developments. In the meantime, if you have questions about withholding requirements for employees who live out of state, please contact us.
