Remote workers â especially those who have been hopping to different states â could be on the hook for additional taxes when they file their returns next spring.
It’s been nine months since the coronavirus pandemic first gripped the U.S. and led to many workers punching in each day remotely. The longer you’ve been away from your home base, the greater the odds are that you could have new state tax obligations.
The situation becomes even more complicated if you’ve been waiting out the pandemic from your vacation home in a different state from where you’re primarily domiciled.
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In that case, you could have multiple reporting and payment obligations in different states.
“What matters is that you stay there from Monday through Friday and you work there,” said Lewis Taub, CPA and director of tax services at Berkowitz Pollack Brant.
“You have this escape house, and it’s helped you create a problem from a tax point of view,” he said.
Many remote workers might not understand that they’re on the hook for more state taxes until they file their returns in the spring.
Indeed, 47% of people who worked remotely were unaware that each state has its own laws related to telecommuting, according to a survey from the American Institute of CPAs.
The organization polled 2,053 adults in October.
Seven out of 10 weren’t aware that working remotely in other states could affect their state tax bill, the AICPA found.
Meanwhile, as many as 3 out of 4 workers have punched in from out-of-state for up to 60 days, according to the survey.
“If you’re working in multiple states during the year, it causes complexity,” said Eileen Sherr, CPA, director for tax policy and advocacy at the AICPA.
“When these people file, they will owe money if they haven’t had any tax withholding in that state, so they need to change their withholding, so they don’t have a big payment in April,” she said.
A patchwork of state laws
Taxpayers who work in one location but reside in a different state could face a tax hit in both places.
States have come up with solutions to mitigate the effect of double-taxation on workers.
For instance, some states have reciprocity agreements with their neighbors to avoid taxing workers’ income twice. Maryland, Pennsylvania, Virginia, West Virginia and Washington, D.C., have such an agreement in place, as do Pennsylvania and New Jersey.
Other locales offer a credit to offset the income taxes workers pay in a different state. This is the case in Connecticut, where many residents normally hop on a train to their jobs in New York City.
A group of seven states follow the “convenience of the employer” rule, which taxes telecommuters based on where their employer’s office is located, according to the Tax Foundation.
Those states are Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York and Pennsylvania.
In the worst case, remote workers could be on the hook for two or three state tax returns because they’ve been working on the go.
If you’re earning money in a state where you’re not a resident, you could be required to file a non-resident tax return there, as well as pay taxes.
“Different states have different rules for when you need to file,” said Sherr.
For instance, employers must start withholding state taxes if an employee has been in Arizona for more than 60 days.
Meanwhile, employees who work in New York even one day are required to file a return, according to the Mobile Workforce Coalition.
You might want to keep quiet about your roaming, but the reality is that states can detect taxpayers who are skirting the law.
For starters, if your employer knows where you’re working, your Form W-2 and state tax withholding would be an indicator of your location, according to Sherr.
“It is also possible that states could audit the taxpayer and ask for documentation, like credit card bills, cell phone records and utility bills,” she said.
Procrastination perils
Get ahead of the issue by being upfront with your employer about where you’ve been.
This way, your state-level withholding will be accurate, and you can head off taxes and penalties in 2021.
Get your recordkeeping in order, too. “I’m calling clients in New York to count their days,” Taub said.
Whether you’re crashing in your vacation home or you’ve been roving state to state in an RV, you should keep track of the states in which you’ve worked remotely and the amount of time spent there, according to the AICPA.
Be specific about your location. Cities and counties can levy income taxes, too.
Make an appointment with your tax professional to get ahead of the problem while you can still act.
“Dual state filing is complex,” said Dina Pyron, partner at Ernst & Young and global leader of EY TaxChat.
“In general, people look at this and say, ‘I don’t know how to file in multiple states and get the right offsetting credits,'” she said.