New Report Shows Which States Impose The Biggest Tax Burden On Remote Workers

In October 2020, six months after the pandemic began, 71% of people with jobs that could be done from home were primarily working from home. The percentage has come down since then, but recent U.S. Census data show that around 18% of the country’s labor force is still working from home, while many more have been given the option. All this remote work has shined a light on an obscure piece of state tax codes—the tax liability of remote workers. In a new report, the National Taxpayers Union Foundation (NTUF) ranks the states based on how they tax workers who work within but live outside their borders.

State tax rankings abound, but NTUF’s new report is the first to rank states based on how they tax remote workers. As the author Andrew Wilford rightly points out, ranking states by how they tax remote workers is more relevant than ever given the increased geographical flexibility of workers. Nearly 28 million workers work remotely, and that number is unlikely to fall any time soon.

The map below shows how the states rank after the data are crunched. The nine states with no income tax are tied for first and get nearly perfect scores since they do not tax the income of in-state or remote workers. Among the states that tax income, West Virginia leads the pack at 10 (score of 28.95) while Delaware is last at 50 (score of -3.1).

The report ranks states according to five factors. The first factor is filing thresholds, which stipulate how long a worker must work in a state before they are required to file taxes there. Some states technically require workers to file taxes if they work a single day in the state (Delaware) while others allow people to work up to 21 days or until they earn a certain amount of income (Minnesota). A lower filing threshold hurts a state’s score.

The second factor is reciprocity agreements. These are agreements between states to treat taxpayers who live in one state but work in another as if they worked in their state of residence.

Reciprocity agreements are uncommon: Only 15 states have at least one and none of the agreements exempt 100% of workers, meaning that even in states with reciprocity agreements at least some remote workers are required to file taxes in multiple states. More reciprocity agreements that cover more workers improve a state’s score.

The third factor is so-called “convenience of employer” rules. These rules require taxpayers who live in one state but work in another to pay income taxes to their employer’s state even if they never even visit their employer’s state. New York is the poster child for this policy. It requires any employee of an in-state company to file taxes in New York unless the employee can prove that remote work is “necessary” and not just “convenient”. Having a “convenience of employer” rule hurts a state’s score.

Surprisingly, Nebraska, not known for poor tax policy, ranks 49^th and is the only state besides Delaware with a negative score. Nebraska’s low score is in part due to it being one of only four states to have a “convenience of employer” rule.

The fourth factor is a state’s income tax code. High tax rates and unnecessary complexity are not unique burdens for remote workers but they are burdens nonetheless. Including them in the rankings gives a more complete picture of the tax burden workers face.

Finally, the last factor is withholding thresholds. These thresholds apply to businesses and specify the wage or time threshold workers must exceed before a business is required to withhold taxes on behalf of the worker. The lower the threshold, the lower the score.

So, what are the best policies according to NTUF? For states with an income tax, the filing threshold should be 30 days or more; reciprocity agreements that cover most workers should be in place with all neighboring states; no convenience of employer rule; and the business withholding threshold should be greater than 30 days.

In theory, federal legislation could put limits on how states tax remote workers as part of the federal government’s power to regulate interstate commerce. In practice, this is unlikely, at least for now. As the rankings show, New York is one of the worst offenders in terms of taxing remote workers, and Senate Majority Leader Chuck Schumer of New York can kill any bill that would limit his state’s taxing ability.

But if the federal government will not act, states can. The increased popularity of remote work gives states a new opportunity to attract workers. Almost all states have room to improve, so states that simplify their tax treatment of remote workers and protect them from undue burdens will gain an advantage.