Avoiding double taxation when working remotely

The COVID pandemic has put a serious strain on travel and visitations of loved ones living abroad. Many individuals who have been working remotely in 2020 and 2021 have relocated to be closer to family – some changing states, others even moving countries to be closer to loved ones. These individuals are now encountering a lot of uncertainty with their tax obligations in the United States and Canada, including federal, interstate, provincial and cross border complexities. In a post-pandemic world, it is very likely that some individuals will keep on working remotely in a different location.

While changes of location may be convenient in many ways, by working remotely in different states or countries than their offices, employees may unwittingly cause themselves and their employers to encounter United States federal and state tax obligations in jurisdictions other than those they had pre-pandemic. Additionally, certain COVID-19 related measures introduced to offer relief may even create double taxation for employees and new taxes for employers. These new obligations may arise at the state level, the Federal level and the cross-border level.

For example, the income of an employee living in Vermont but working in Massachusetts before the pandemic was subject to tax in Massachusetts and Vermont, and Vermont would allow a credit for the tax paid in Massachusetts. However, if this employee worked from home in Vermont during the pandemic, he could be double taxed as Vermont will consider the income earned in Vermont during the pandemic as taxable in Vermont while Massachusetts will continue to tax the income as Massachusetts source income. State payroll deductions at source must also be considered for the employer.

Further complications could arise if the individual was working in Massachusetts and living in Quebec (coming back from Boston every weekend to be with his family) before the pandemic. During the pandemic, the individual works from home in Quebec. Now, in addition to being subject to tax in Massachusetts (Massachusetts still taxes the income), Canadian and Quebec tax rules would apply and a foreign tax credit may not be available in Canada and in Massachusetts resulting in double taxation.

A thorough evaluation of the applicable rules, as well as considerable judgement and a lot of good faith must often be demonstrated to support a filing position when telecommuting and working remotely. Please remember to consult a tax specialist to navigate these rules and help limit double taxation or the application of undesirable penalties.