Taxes: Remote and hybrid workers could face double taxation on state taxes

If your employer is outside the state where you worked remotely in 2023, you could face double taxation. Being a hybrid worker might also mean you get snagged.

With the onset of the pandemic, many employees worked remotely for the first time. After the pandemic, hybrid work schedules became more prominent, triggering tax implications.

Last year, 12.7% of full-time employees worked remotely, and 28.2% had a hybrid work schedule.

State income tax rates range from as low as 2.5% in Arizona to a high of 13.3% in California. But even if you live in a state with no income tax, you could get hit with a bill if you commute to a state that does.

Here are other scenarios you might face as a remote or hybrid worker and what you can do.

Double taxation with 'convenience of the employer' rule

Some states tax workers where their employer is located, whether or not the employee lives in that state, based on the "convenience of the employer" rule.

"If your employer is in one state and you live in another state as a remote worker, there are six states that have ‘special convenience of employer’ rule," Garrett Watson, analyst at Tax Foundation, previously told Yahoo Finance. Those states are Connecticut, Delaware, Nebraska, New Jersey, New York, and Pennsylvania.

If your employer is based in one of these states, but you work out of the state remotely for your convenience, then you might be subject to double taxation in the state you live in and the one where your employer is based.

"The convenience rule can result in individuals paying state income tax on more than 100% of their wage income due to the lost out-of-state credits on their resident state tax returns," Mandy R. Riles, a tax manager at WIPFLI, said in her article.

Some taxpayers may be able to avoid double taxation through state reciprocity agreements.

Read more: What is taxable income?

State reciprocity agreements

Some states have reciprocity agreements with neighboring states that allow residents to avoid double taxation. Reciprocity agreements mean workers are taxed once in the state they live.

"For example, if you live in Quincy, Illinois and work in Davenport, Iowa, Iowa has a reciprocal arrangement with Illinois so Iowa does not tax that income, and all taxation occurs in Illinois, the worker’s home state," Tom O’Saben, an enrolled agent and director of tax content for the National Association of Tax Professionals, told Yahoo Finance.

Sixteen states have reciprocity agreements with neighboring states, according to the Tax Foundation. They are Illinois, Indiana, Ohio, Michigan, Wisconsin, Iowa, Minnesota, Kentucky, Virginia, Pennsylvania, Maryland, New Jersey, West Virginia, Montana, North Dakota, and the District of Columbia.

Even if your state doesn’t have a reciprocity agreement, it may offer a credit for the taxes you paid in another state, but you may have to file taxes in two states.

Say you’re a hybrid employee working in St. Louis, Mo., and living in Illinois.

"When this happens," O’Saben said, "the Illinois resident pays tax to the state where they work, Missouri, and the state of Illinois will tax that same income but provide a credit for the taxes paid to Missouri up to what Illinois would have charged on the same income. So double tax should be avoided."

Even though you may have to file two state returns, as in the example above, because of the credit, you are not paying tax twice on the same income.

Read more: How bonuses are taxed (and why it matters)

What to do if you’re a hybrid or remote worker

"Check with your company’s HR department to see if there will be additional state withholding for the non-resident state," Janet Krochman, a certified public accountant, told Yahoo Finance. "If so, prepare a separate state W-4 form to minimize the other state withholding, especially if you know you will be getting a full refund or credit from your state."

If you live in one state and work in another state, remotely or on a hybrid basis, it is best to consult a tax professional to determine if you will be subject to double taxation or if your state has a reciprocity arrangement with neighboring states.

If you can’t afford a tax professional, you can receive free tax preparation at the Volunteer Income Tax Assistance if you made $60,000 or less last year, are disabled, a senior citizen, or have a language barrier.

Ronda Lee is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow her on X @writesronda

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