By: Svetlana Goldina, CPA
The pandemic created an increased desire and/or need for individuals to work from home. As both employees and employers have become more accustomed to the new remote work environment, it is important to consider the tax implications. This blog will address some of the implications for employees.
While employees have started working remotely, some have considered relocating to lower-taxed states, or even to states that do not have a personal income tax (i.e., Florida or Texas). Some employees may use the remote environment as an opportunity to travel and temporarily live and work abroad. Each of these situations has tax implications to consider.
Some states, including Pennsylvania, follow the “Convenience of the Employer Rule.” Generally, PA can only tax a non-resident individual’s compensation if it was earned in PA. The Convenience of the Employer Rule states that the compensation for services performed by non-resident employees cannot be allocated to the place of performance if the services were performed only for the employee’s convenience, or, if the services were not performed there for the necessity of the employer. Thus, if a Delaware resident working for a PA company chooses to work remotely from home, the individual’s wages will still generally be PA source income, assuming the employer provides a place to work in PA.
The taxability of wages in PA is not as clear-cut if an employee makes a permanent move to another state. There are several factors to consider in determining where the employee’s wages will be taxed. This is outside the scope of this blog. Also, if a PA company hires a full-time remote employee who is a resident of another state, the employee’s wages will not be subject to PA income tax under the Convenience of Employer Rule if the company is not providing the employee with a place to work in PA. Keep in mind that PA has reciprocal agreements with various states including New Jersey. In these cases, only the resident state can tax the individual’s wages.
Individuals taking advantage of the opportunity to work remotely in another country are also subject to the Convenience of Employer Rule if their resident state follows the rule. Individuals may also be subject to taxes in the foreign country. Each country has different rules and careful planning is needed. Some destinations offer digital nomad visas that will exempt an employee from local taxes, as long as the employer is based out of that country. Individuals also need to be aware that all US citizens are still obligated to report worldwide income on their U.S. personal income tax returns, even while working in a different country. Individuals who pay foreign income tax may be entitled to a credit on their U.S. income tax returns. Individuals may also be entitled to a foreign earned income exclusion for extended stays abroad if they meet a bona fide residence test and a physical presence test.
If one is considering working remotely from another state or country, it is important to consult with a tax advisor to help navigate through the various tax implications. It can get extremely complex and complicated, depending on the circumstances of the employee.