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Opinion: Working from home during COVID-19 pandemic might make your taxes higher

Andrew Wilford

Millions of Americans have been forced into new remote work arrangements during the coronavirus health crisis. The health risks are paramount, but day-to-day challenges like video conferencing and childrens' education have made the situation even harder for remote workers. And absent action from Congress, remote work can have consequences for these taxpayers’ wallets as well.

Lockdowns, social distancing guidelines, care for sick loved ones and other reasons have seen Americans begin working in a state other than their normal work site since the onset of the pandemic. They may not be aware, however, that doing so could expose them to income tax filing and payment obligations in different states.

Millions of Americans could potentially run afoul of these rules and face additional tax obligations, based on surveys of Americans switching to remote work and census data of pre-pandemic interstate commuters. This number could potentially be even higher, as taxpayers who reside in the same state as their work offices could still face new tax obligations if they work temporarily somewhere else. For Michigan specifically, this could mean around 91,000 Michigan residents facing these new tax obligations. 

1040 tax forms instructions printed from the Internal Revenue Service web page that are used for 2018 U.S. federal tax returns.

Absent action from Congress, this can have real consequences. Not only do they have to face the already substantial burden of record-keeping and updating withholding at a time when most Michigan residents have greater things to worry about, but working remotely in higher-tax states could lead to an unpleasant surprise when it comes time to file taxes next year.

Even Good Samaritans are not safe from the taxman. When thousands of out-of-state health care workers put themselves at risk by volunteering to travel to New York City, answering its pleas for aid during the pandemic, they thought they were doing a good deed. But New York has made clear that it will tax these volunteers, with Governor Andrew Cuomo claiming that the state is “not in a position to provide any subsidies right now.”

Such actions are unfortunately unsurprising given New York’s status as a high-tax state that is known for rigidly pursuing every tax dollar from people who do work in the state. An analysis  I conducted for my organization of what kinds of taxes that some of these health care emergency workers may face when doing remote work in New York found that a registered nurse may see a $750 tax increase, and an ER doctor could face as much as a $1,200 tax hike. Though New York is just one state aggressively pursuing remote workers’ tax revenues, the increased burden other states’ taxpayers can face from being subjected to its tax regime shows the danger of failing to rein similarly aggressive states in.

And for Michigan taxpayers who normally work in one of a few states, this can work the other way as well. Arkansas, Connecticut, Delaware, Nebraska, Pennsylvania, and (of course) New York enforce a so-called “convenience of the employer rule.” This means that Americans who normally work in one of these states but switched to working in Michigan for any reason other than absolute necessity can still face tax liability in that state. Often, those wages get double-taxed, meaning that they can face tax bills on the same income from Michigan as well. 

The tax consequences of paying double state income taxes can be catastrophic to taxpayers trying to get by in a recession and a pandemic. A taxpayer making just over $42,000 a year splitting time between Connecticut and New York could see a tax increase of just under $1,400.

Michigan small- and medium-sized businesses can face difficulties from these rules as well. Because just one employee working in a state can expose a business to tax obligations in that state, employees working remotely can create headaches for business tax compliance, including the need to file in additional states or apportion their taxes differently. Not only is this an additional compliance burden, but it could discourage businesses from following public health guidelines and allowing employees to work remotely.

The good news is that these are solvable issues. Sen. John Thune, R-S.D., introduced bipartisan legislation that would address these problems by limiting states’ ability to go after the income of remote workers, volunteers, and businesses on the basis of COVID-induced remote work. The Senate’s Phase Four proposal also included a version of this legislation that would likewise address the problem of states aggressively taxing remote workers.

Michigan’s own Sen. Gary Peters cosponsored very similar legislation of Thune’s prior to the pandemic’s onset, S.604, which would have set a lower 30-day threshold (as opposed to 90 days under Thune’s more recent proposal) of working in a state before that state could attempt to tax the income of remote workers.

It’s clear there’s a bipartisan consensus that a national solution for remote workers is needed.

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.

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