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Retired Military Finances 201: Remote Work and State Income Taxes

Taxes

One of the great things about being on Active Duty (besides getting to fly fast jets) is not having to pay state income taxes...at least if you get stationed in the right state and choose to make it your residence. That all changes when you retire and for many the change is a significant emotional event

State income taxes are, in most cases, paid to the state where you work. Some regions have agreements that allow you to pay state income taxes to the state where you live. That is the case here with VA, MD and DC. But it isn't the rule. And, technically it can apply to a single day's worth of income. This is an issue for professional athletes and is called the Jock Tax. I've also seen it be an issue for airline pilots who go to sims or training in a state different from where they live.

If COVID-19 has forced you or you have chosen to work from a location in a state other than where your office was located you may have an issue. If you're an employer and you've sent your workers "home" to work, you could have issues as well. Let's take a look.

Tax Consequences for Military Retirees Who Start Working in Another State

Let's assume you live and your normal work location is in Florida. Congratulations. No State income tax. But your office gets shut down and you decide to spend the summer working remotely from your vacation home in the mountains of North Carolina. You've now established a tax nexus with NC and they have the right to tax you as a non-resident with earnings in NC. You'll want to do a couple of things (if possible).

  1. Start tracking the income you earn while in NC
  2. Determine if there is a waiver from the state income tax if you are in NC due to COVID-19
  3. Inform your boss that you're working in NC
  4. See if your employer can start withholding state income taxes

Under normal circumstances, your military retirement won't be taxed as you're not "earning" it in NC. But if you spend too much time in the state, you could become a resident without realizing it. At that point your military retirement will become taxable for the period of your residency (assuming the state taxes military retirement).

Tax Consequences for Military Retirees Who Have Employees

If you've told your employees to work from home or if you start a virtual business, you'll need to think about a few things as well. Beyond the income tax issue, you may have reporting requirements with the State(s) where your employees are working, plus you may also have to pay state unemployment insurance. If you're going down the virtual path, here are some things to consider/actions to take.

  1. If your employees are working remotely due to COVID-19, determine if any of the states involved are waiving requirements
  2. Determine if you have reporting requirements with the state(s)
  3. Determine if you are required to withhold taxes for a non-resident working in the state(s)
  4. Determine if you are required to pay unemployment insurance

If your employee will permanently reside in the state (as in the case with virtual office), you almost certainly need to accomplish 2 - 4 above.

Military Retiree Taxes Can Be Pretty Complicated

Military finances and taxes can be different than civilian finances and taxes. We think it is in your benefit to work with an advisor that deals with these differences every day. If you'd like to find out how we do things, give us a call.


If you found this article useful you might like the following blog posts:

Transition Tax Topics: Watch The Roth


Planning on Working on Terminal Leave? Mind Your State Taxes


The Tax Bomb Waiting for Retiring Senior Military Officers




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