At the beginning of the Covid pandemic, just five percent of American white collar workers worked remotely full time. By the end of 2020, it was two out of three! With an open-ended break from the office, some opted to work remotely from a different state—often one that was warmer, cheaper or closer to family.
While traveling to another country became all but impossible, taking off for another state seemed simple enough. Few employees gave any thought to tax considerations and many saw no need to tell their employer about their plans.
According to a recent survey by the Association of International Certified Professional Accountants (AICPA):
- More than half of Americans who have worked remotely during the pandemic (55 percent) are not aware of possible tax consequences from not changing their state tax withholding to reflect their remote work location.
- Forty-seven percent are not aware that each state has their own tax laws related to remote working.
- Less than half (46 percent) are aware that the number of days they worked out of the state where their physical workplace is located may impact the amount of state taxes owed.
Wages are Taxed Where You Earn Them
Each state has its own tax rules and each treats temporary workers differently. You don’t need to own property or rent an apartment in another state to incur a tax obligation. Even staying with relatives, crashing on a friend’s Murphy bed or taking an Airbnb in another state for a few months could trigger a tax burden, if that was your work location.
If any of these scenarios sound familiar, you’ll need to assess your tax situation in each of the states where you worked during 2020. You might need to file multiple tax returns, and in some cases, you might owe taxes in more than one state.
Why? In general, your wages are taxed where you earn them—but your home state can tax all of your income from wages or other sources. So if you live in Illinois but decided to work temporarily from Arizona, you might need to file your typical Illinois resident tax return and also an Arizona nonresident form. Even if no taxes are due in your temporary work location, you might still be required to file a return.
Most of the time, you won’t be paying double tax. Right now, 43 states will credit any taxes you paid to a different state while working there. If you told your employer about your plan, they should have withheld tax for your temporary work state, but even if they didn’t, that doesn’t remove the obligation.
It Gets Even More Complicated for Remote Workers
Some states have tax agreements with other states. These are most common in metro areas where employees work in one state but live in another contiguous state. When there’s an agreement in place, workers usually file and pay taxes only in their home state.
Other states tax remote workers based not on their location but the location of their employer’s office. For example, Massachusetts is taxing New Hampshire residents who formerly worked there but are now telecommuting from their homes in New Hampshire. For its part, New Hampshire says that Massachusetts is taxing its residents for work performed within its borders. It asked the U.S. Supreme Court to review the matter, and other states have filed briefs requesting a review.
And finally, according to the AICPA, at least 13 states and the District of Columbia have decided that temporary remote work in their state due to the pandemic will not create an income tax obligation: Alabama, Georgia, Iowa, Indiana, Massachusetts, Maryland, Minnesota, Mississippi, North Dakota, New Jersey, Pennsylvania, Rhode Island, South Carolina and the District of Columbia. In addition, nine states don’t tax earned income at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
Remote Work from Another State Also Affects Employers
Your employer also can be affected by your decision to work from another state, particularly if it’s a state where the company doesn’t already have operations or employees. The company might need to register with the new state and may incur obligations for workers’ compensation, unemployment insurance, state income taxes, franchise taxes, sales taxes and more. This is all the more reason to discuss any remote work arrangements with your employer and seek approval.
Tips for Employees Working from Home in a Different State
- Consider hiring a tax professional to help you determine your filing and payment obligations.
- Before tackling your taxes, think about the states where you worked during 2020 and calculate how many days you worked in each of them (estimate if you’re not sure). About half of states do not impose a tax burden unless you work there for a month or two, but others assess taxes on day one.
- Some cities, counties, school districts and other bodies also levy income taxes, so you’ll need to research this as well.
- Don’t ignore the situation and assume no one will ever find out. If your remote work is discovered in an audit, you could be liable for back taxes, interest and penalties.
- Make sure your employer is withholding tax in the state where you’re working. States usually require income withholding throughout the year and you could owe back taxes, interest and penalties if taxes weren’t withheld in the correct state.
- Tax rules apply to employees of companies and also gig workers. The tax obligation is determined by where income is earned, not your employment status.
And finally, if you took off for another state early in the pandemic and didn’t look back, you might have inadvertently changed your state of residence and your overall state tax obligations.
This is general information. You should always consult a tax professional about your own unique situation.
Want to know more about Employer and Transferee Taxation of Relocation Expenses?
Relocation Tax and the Mobile Workforce will cover:
- Relocation Tax Best Practices
- Tax Guidelines for Homesale Assistance benefit
- Relocation Policy components and Taxability