As the pandemic persists, millions of Americans are continuing to work remotely, a trend that could last far beyond the pandemic. What does this boom in working remote mean for state income tax?
With an influx of employees heading to summer homes to work, or workers not crossing state lines to head to the office, may end up owing income tax of the state in which they are now working remotely vs where they used to report to.
In normal times, the employer would report the states in which you worked on your W-2 and would then withhold wages accordingly. But this year that might not be the case as it could be left to the taxpayer to reallocate their wages by state themselves.
Prior to the pandemic, most people who live in one state and work in another would pay their taxes on the income earned in the state where they worked, and would then get a credit on their state tax form from the state in which they live. Now many people who used to commute out of state but are working from home may claim that tax revenue for themselves.
Thirteen states and the DC have addressed the 2020 pandemic situation. They've said they won't tax workers who've relocated there temporarily due to the pandemic, according to the American Institute of CPAs. Rather, they will pay taxes to the state where their employer is located, like normal.
There are select areas that have created agreements with other states for tax income. But generally, you will pay your taxes based on where you work or earn your income. Jared Walczak, director of state tax policy at the Tax Foundation explained “It’s one thing if someone who normally works in New York is now working out of New Jersey because they’re working from home, But that employee might say, ‘I need to go to Arizona to be with family. It introduces this random tax element.”
As I mentioned before, there are areas of the country the tax departments have made it easy on their taxpayers- the District of Columbia, Maryland, and Virginia have set up reciprocity agreements that help simplify things for their taxpayers. These mean taxpayers owe only the income tax of the state in which they live, not the state where they work.
Others, like New York, have set up an income tax credit. So for example, you might normally work in New York but you have been working from your home in a nearby state, such as Connecticut, since March. Connecticut will provide you with a tax credit related to what you paid to New York.
Get Educated:
Even if employers don't ask where you've been working, your state tax departments have ways of finding out where you have been working / living and there could be consequences, like an underpayment penalty. You could also face a bigger penalty if you fail to file a non-resident income tax return in the state next year.
No matter the state you live and work in, if you are potentially working from home or remotely for the time being, it’s a good idea to get familiar with how your state is going to treat your income. If you plan on staying in a different state to weather the pandemic, look into how long you can ‘stay’ before you become subject to tax requirements.
Sources:
https://www.govtech.com/budget-finance/Remote-Work-Boom-Complicates-State-Income-Taxes.html
About the Author: Taylor Genter Taylor is the Marketing Specialist at Extract with experience in data analytics, graphic design, and both digital and social media marketing. She earned her Bachelor of Business Administration degree in Marketing at the University of Wisconsin- Whitewater. Taylor enjoys analyzing people’s behaviors and attitudes to find out what motivates them, and then curating better ways to communicate with them.