Over the years we have written articles on taxing workers that work remotely or that work as Independent Contractors (IC) or Gig/Gap workers and not as Employees (EE).
Most of those articles centered on the issue of how companies might be taxed when using workers in the same state that the Employer (ER) contended were workers that were IC and not as an EE. This same concern of whether a worker was an IC or EE has arisen in many cases throughout the US, but especially in more recent cases in NY, NJ, and Ca. (See prior Levine Newsletters on this issue and prior Tips, especially those discussing the case of Dynamex. (Dynamex Operations, Superior Court, 4 Cal. 5th 903, 232 Cal. Rptr. 3d 1, 416 P.3d 1, 83 Cal. Comp. Cas. (MB) 817, 27 Wage & Hour Cas. 2d (BNA) 1271, 168 Lab. Cas. (CCH) Para. 61859).
This Tip continues addressing the issue of IC vs EE and related issues. However, the focus in this note is on the tax issues that are involved for these workers that undertake work, whether as an EE, IC, or Gap/Gig worker in one state when the ER or office of the company is in another state.
In an interesting article by Noah Peterson (2/14/2024) at the Tax Foundation, this issue as to how the employee worker is to be taxed when working remotely in a state other than the office of the ER, was examined. This research also encompasses workers that work as an EE or Gig worker, but in a state different than the office of the ER.
According to the Tax Foundation article, last year in 2023 there were about 13% of full-time workers that worked from home. Some additional 28% worked sometimes in the office of the ER and sometimes at home. Many of these 41% of workers worked in one state that was different than the office of the ER.
The tax issue is that normally one works in the same state where they live; in turn, the taxing of the income for the EE is in the same state in question. However, where the EE lives in a state that is different than the office of the ER, the question is raised as to how the EE is taxed. The concern, as pointed out by the Peterson article in the Tax Foundation publication, is the EE might be taxed in two states.
This may not be a problem if the EE receives a credit for the tax the EE paid to another state. However, in some instances the EE may be taxed in two states and not receive a credit for taxes paid to the “other” state. Further, there is the question of which tax should be paid, as a net number, if one state tax results in a greater amount paid. For example, what if the EE paid tax to state X of $30,000 and the EE paid tax to state Y of $45,000. Does the EE have the option to take the position that the tax for state tax should be the lower of the two amounts, when the EE works in both X and Y states?
As noted in the Peterson article, five states tax EEs where their ER office is located, even though the EE never visits the ER office in the given year.
If the EE works in a hybrid capacity by working at home in one state and in the ER’s office in another state, this raises additional issues, not all of which have been resolved by the two states in question. There is also the practical problem of having to file multiple state returns.
Some states have reciprocity agreements, noted Peterson, to resolve these issues. Unfortunately, not all states have such agreements with all other states.
Thus, workers coming within the above multiple state positions must be careful to examine these state positions or engage proper help to avoid the above enigmas.
By
Professor Mark Lee Levine, University of Denver
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