Tax implications of moving to a different state to work remotely

[bleven1]

I presently work and live in California, and will be moving my residence to Pennsylvania permanently (PA house and driver's license, and no property owned in CA).  My boss wants me to work remotely from PA.  Let's say that it happens on June 30 so that I spend 6 months in CA and 6 months in PA.  What are the implications of my company continuing to withhold as if I live in CA for the whole year?  Will everything be reconciled when I do my taxes? i.e. I will claim 6 months in CA, and get a big refund, and claim 6 months in PA and owe a lot to PA?  Do I have to worry about CA taxing me for the whole year?  Do I have to worry about PA penalties for underwithholding? 

This seems like a bad idea to me, and I want my company to switch my withholding to PA when I move.  I want to understand the above implications, so I can educate my boss on why it is a bad idea not to switch the withholdings to PA.

[MarilynG1 · Accepted solution]

For 2021, you are correct that you will file a Part-Year Resident Return to both California and Pennsylvania if you move to PA mid-year. You report the income earned in each State on their return. 

 It would be much easier for you if this is broken down on your W-2 for you, if your employer starts withholding PA tax for you when you move. Otherwise, you will need to calculate the amount of income earned in PA yourself, based on number of days lived there vs. total days, etc. 

You are correct that you would get a Refund from California, if you pay tax on your entire income there in 2021, filing as a Part-Year resident. 

You are also correct that you should owe Pennsylvania, since you paid them no tax on your income earned there.  However, PA will give you credit for tax paid to another state, so you may not owe them much (if any). Underpayment Penalties would not apply. 

Click this link for more info on How to Allocate Income for a Part Year Resident . 

For 2022, if your employer continues to withhold CA tax on your wages, you will need to file two state returns; a Non-Resident return to CA and a Resident return to PA, with the same issue of reporting 'tax paid to another state' on your PA return. 

So the ideal situation for you would be to file (and pay for) only one tax return; a PA Resident return with PA taxes withheld on your income.

Hope this info helps you to convince your employer to start withholding PA tax for you (at least by beginning of 2022). 

Click this link for more info on Working Remotely for Out of State Employer.

[bleven1]

Thank you Marilyn.  So it sounds like for 2021, it would create a hassle, but no double taxation.

[BR8]

Hi! This is such a great answer - so helpful. I just wanted to double check -- would this same information apply to exact same situation, but the states in question are (moving from) New York to North Carolina during 2021.

[TomD8]

@BR8 --

Unfortunately your situation is not the same because of the states involved.  If you move during the tax year, you will file a part-year resident return in each of the two states.  However, New York is one of a handful of states that tax non-resident remote workers according to the "convenience of the employer" doctrine.  Simply put, if you continue to work remotely for your New York employer after your move, your income will continue to be taxable by NY (as well as by your new resident state of NC) unless you are working remotely at your employer's direction - as opposed to your own convenience.

https://www.tax.ny.gov/pdf/memos/income/m06_5i.pdf

California, in contrast, does not tax non-resident remote employees who work from a location outside CA.

If your remote income is taxable by both states, you'll be able to claim a credit on your NC tax return for the taxes paid to NY on that portion of your income.  This avoids double taxation.

[Hal_Al]

For other reading this: be advised that New York, Pennsylvania, Nebraska, Delaware and Arkansas and Massachusetts (to a degree) have the same rule.

 If you work outside the state as a job requirement, you are only subject to New York State income tax on the days you physically work in New York. But if you work outside New York for your own convenience, you are subject to New York State income tax on all your income. Pennsylvania, Nebraska, Delaware and Arkansas have the same rule.  Massachusetts is a newcomer to the list, as it adopted a temporary measure to continue taxing the wages of workers residing in New Hampshire amid the pandemic.