New York's tax code is a WFH nightmare

Living in one state and working remotely for a company based in a different one shouldn't be such a pain when it comes to taxes — but oh, how it is. Especially if your employer is in New York.

Most states say nonresidents are on the hook for state income taxes only if they're physically working in that state. New York, on the other hand, known for aggressively pursuing nonresident workers' incomes, says if you're based out of a company's New York office, regardless of where you're actually sitting, you're subject to its income tax. (A position it took even during the height of the COVID pandemic, when most offices were closed and employees had no choice but to work from home.)

So if you work remotely a few days a week from your home in say, New Jersey or Connecticut, or five days a week in a state farther away, the New York tax authorities still want your employer to have New York income tax withheld from your paycheck — as though you were in the New York office for five full days. Only four other states take an approach similar to New York's.

It's time they all fell in line with how the rest of the country treats taxes when it comes to teleworking.

Taxing people who are working remotely wastes employees' and employers' time and can hit some with unfair taxation. It encourages people to make inefficient decisions about where to work and when, and even whom to work for. Businesses may end up opening offices in other states for the wrong reasons, too — not because they need a satellite office there, but because they want to avoid placing additional tax burdens on their workers.

Let's say you live elsewhere, but work for a New York-based office. As you start to get your paperwork in order for 2022's taxes, remember, you'll have to file state income tax returns in the state you live, along with income tax returns for New York regardless of how many days you were physically in the office.

It's imperative to keep track of where you were and when, especially if you earn north of six figures; one wrong move and you could get hit with a standardized audit form from New York state asking for the details and potentially face underpayment penalties.

If you live in a nearby state such as New Jersey or Connecticut, you'll typically receive tax credits from your home state to prevent you from being double taxed. But it's not always an equal swap depending on your home state's tax rates and how those rates apply to different income levels, says Eric Bronnenkant, head of tax at online financial advisory firm Betterment.

And who knows how much longer New Jersey and Connecticut will keep making residents whole? Instead, the states seem to be heading in the wrong direction, making retaliatory moves. Last fall, New Jersey Governor Phil Murphy proposed legislation that would mimic New York's. Connecticut already has a similar rule on the books.

Beyond the tri-state area, the hardest hit are those who work for New York-based offices, but whose states don't provide credits. This includes residents of states without income taxes, such as Florida and Texas. Sure, they won't be double taxed, but they also won't reap the full benefit of living in a no-tax state.

New York-style tax policies can also be a drag on business travel. A patchwork of rules dictate how much time business travelers can spend in-state before they start owing tax — it can be as little as one day to as many as 60 days, with the amount of tax owed generally proportional to the time spent in the state. Some states specify that these income taxes are triggered once you earn over a certain amount of income. Regardless, it's a silly use of time for employees and employers to be calculating to ensure they're in compliance. Someone who travels a lot for work has to keep meticulous records to figure out when they need to file another state's income tax return — after just one day in Delaware or Colorado, more than 30 days in Illinois, or more than 60 days in Utah.

In a perfect world, New York and the other states that tax remote workers would follow the example of Washington D.C., Virginia and Maryland, where there are a lot of cross-border workers, and offer reciprocity. That means you'd only have to file state income taxes where you reside. It seems a lot simpler than having to go through the multiple-income-tax-return dance, no? Unfortunately, New York won't go for that because it would mean too much lost revenue.

A more realistic solution from a group called the Mobile Workforce Coalition is to establish a standard for all states that says you can only tax workers if they're physically present in your state. And, to avoid the business travel chaos, it would establish a 30-day threshold for all states. Therefore, only if you're physically in a state for more than 30 days would you be on the hook for that state's income taxes.

Different iterations of establishing a standard for all states has been floating around Congress for years. As remote work becomes more commonplace, it's clear it's the best way forward for taxpayers everywhere.