22 Mar How should my income be taxed when I work from home?
Q. My employer is located in New Jersey and I live in Brooklyn, New York. Before COVID, I worked in my New Jersey office but since the pandemic, I have been working remotely from my residence since March 2020. Should my employer continue withholding New Jersey taxes from my paycheck?
A. There have been a lot of people wondering how working for an employer based in one state while working at home in another state will affect their taxes.
New Jersey’s stance has been pretty clear.
“New Jersey sourcing rules dictate that income is sourced based on where the service or employment is performed based on a day’s method of allocation,” said Laurie Wolfe, a certified financial planner and certified public accountant with Peapack Private Wealth Management in New Providence. “However, during the temporary period of the COVID-19 pandemic, wage income will continue to be sourced as determined by the employer in accordance with the employer’s jurisdiction.”
From New Jersey’s viewpoint, this statement goes both ways, Wolfe said.
Whether it’s New York residents working for a New Jersey employer or vice versa, the income should be sourced to the employer’s jurisdiction during the pandemic, she said.
So, according to New Jersey, your employer will continue to withhold New Jersey taxes, at least until the restrictions are removed, she said.
Whether New York will go along with this remains to be seen, she said.
“But since New York has a hard stance on this as well, it would be contradictory of them to claim this income from New Jersey whilst claiming the income from New Jersey residents who are working from home for a New York employer,” she said.
The next question is what happens when the pandemic restrictions are lifted and you don’t return to your New Jersey office? What if you continue to be able, and do work remotely from home, will this be challenged?
Wolfe said we will have to wait and see how this plays out, noting that right now, there are several lawsuits at the Supreme Court level from New Jersey, Connecticut, Hawaii and Iowa which challenge the ability to tax nonresidents’ income while they are working remotely.
Seven states follow the “convenience of the employer” rule, she said.
This means that they tax employees based on their employer’s location, not the location where the work is performed, she said.
New York is one of these seven states.
“Their rule says that employers are required to withhold New York income tax from wages paid to employees who are working from home outside of New York if it is for the employee’s — not the employer’s — convenience,” she said. “To satisfy the convenience of the employer test, an employee would have to establish that their home office constitutes a `bona fide employer office.’”
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This story was originally published on March 22, 2021.
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