With over 4.3 million people in the U.S. working remotely due to the pandemic, there could be tax consequences many are unaware of. If you worked remotely from a state outside of where you claim residency, you could be on the hook for tax payments and reporting in that temporary location. Many workers in this camp were not aware they should have adjusted their state tax withholding to adapt to this unique situation they found themselves in.
What’s Being Done
Some states such as Maryland, Pennsylvania, Virginia, West Virginia and Washington, D.C. have an agreement in place to keep worker’s income from being taxed twice. Check out which states and districts have reciprocal tax agreements. Other states, like Connecticut may offer a credit to temper the impact of double taxation. Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania have adopted the “Convenience of the employer” rule, which provides that employees who telework will be taxed based on where their employer’s office is located. The lines get blurred when determining when COVID-19-related work from home arrangements are no longer considered temporary, resulting in any COVID-19 related exceptions no longer applying. Things can get even more muddy in the situation where you work from home for more than one employer or are an independent contractor. In many cases in New York, double taxation has been an issue. States generally apply their own sourcing rules in determining whether an individual is entitled to a credit for tax paid to another state. Because of this, a New York non-resident employee who is working remotely during the pandemic may not be entitled to a credit for taxes paid to New York for compensation earned outside the state. Also, 13 of the 41 states that tax income has indicated they will cut a break to those who moved because of the Coronavirus. These states are Alabama, Georgia, Illinois, Indiana, Massachusetts, Maryland, Minnesota, Mississippi, Nebraska, New Jersey, Pennsylvania, Rhode Island, and South Carolina.
Legislation may come to the rescue, but only time will tell. The Multi-State Worker Tax Fairness Act has been introduced multiple times since 2016. This legislation would limit the ability of states to tax nonresident telecommuters. There is also a proposal in the Senate’s pandemic relief bill (HEALS Act) that includes a temporary provision which partially restricts double taxation through 2024. This bill would also have uniform rules concerning the assessment of state and local income taxes. Neither proposal has received a green light.
Different states have different rules. You will have to check the specific rules for the states you are working and/or residing in. For many, multiple state tax returns may need to be filed if you are working in a state as a non-resident. This is not a new issue for some. Entertainers, professional athletes, and snowbirds, to name a few, have been victims of this dilemma for quite some time. It seems we are just adding another category to this unlucky group. Although some home states may offer a credit for taxes paid in other states, if the tax rate is higher in the new location, the credit may not be enough to offset the entire bill.
Many businesses are stating they will continue to allow employees the ability to work remotely even after people are able to return to the workplace. This may be good news from a flexibility standpoint, but not as good from a tax standpoint, as having employees in other states can raise business and sales taxes for companies.
The obvious problem is many failing to file a mandatory state tax return due to lack of knowledge. This will lead to an influx of audits, penalties, amended returns and taxes.
What Can You Do?
- Talk with your employer to determine your liability.
- Research and understand the rules of the states you are living in/working in.
- Talk with a certified professional accountant to assess your situation and determine if your tax withholding needs to change.
- Keep good records of when you were in each state, how long you were there and what you did while you were there.
The effects of this matter are far reaching. According to a Pew Research Survey taken in June, nearly one in ten adults between ages 18 and 29, said they had relocated because of the pandemic. With many companies looking to adopt telecommuting as a permanent solution for employees, we are in for some complex tax situations and muddy waters in 2021.
Sources: NerdWallet/ CNBC/ Fox Business/ Forbes
© Geier Asset Management, Inc. November 2020. Dan Mules, CPA is a Client Manager and Tax Planning Professional for Geier Asset Management, Inc., a Registered Investment Advisor. The articles & opinions expressed in this material were gathered from a variety of sources, but are reviewed by Geier Asset Management, Inc. prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. The views expressed are those of the firm as of November 2020 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. Any advice given is general in nature and investors must consider their own individual circumstances. In all cases, please contact your investment professional before making any investment choices. Geier Asset Management, Inc. is not responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.