- Working remotely during the coronavirus pandemic could affect your 2020 taxes
- How does working remotely affect your taxes?
- What states plan to tax remote workers?
- Could your income be taxed twice?
- What is the “convenience” rule?
- What should you do if you think your 2020 taxes might be affected by remote work?
- Why many remote workers are facing a tax season nightmare
- The vacation home dilemma
- The parent trap
- The pandemic hero tax
- The COE rule
- If you left your home state to work remotely in 2020, there are tax implications to consider
- Establishing your state of domicile
- Considering your state(s) of residence
- Relief for taxpayers who live and work in different states
- Temporary safe harbor
- Tax credits
- Reciprocity agreements
- What to do now to avoid a big tax bill
Working remotely during the coronavirus pandemic could affect your 2020 taxes
When you left your office in March, you might have not known that it would be your last day there.
Maybe you did, but you probably didn’t think that it would be your last day there for over three months.
Whatever the situation was in your case, you probably scrambled to get a home office ready, or maybe you made plans to head somewhere else to ride out the storm of the coronavirus pandemic.
Some offices around the country have begun to reopen, or have begun to discuss reopening, but some organization’s have decided to keep this whole “working remotely” thing around for the long haul.
Before you sign up to work remotely indefinitely, there is something you should think about.
If you are completing the duties of your job from a state other than the one where your company is located, you may need to file returns and pay taxes in the state from which you are currently working.
“People dispersed pretty quickly when stay-at -home orders went into effect,” said Katherine Loughead, Senior Policy Analyst at the Tax Foundation.
“A lot of my own colleagues went to different states to ride out the pandemic with their families and people weren’t thinking about how that could trigger income tax liability, not only just for them, but for their employers.
I think we’ll see a lot of states that will unfortunately try to be stingy and enforce that as they are looking for revenue.”
How does working remotely affect your taxes?
If you are working in the same state in which your company is based, your taxes might not be affected at all. However, if you find yourself living, and therefore working remotely, in a state other than the one in which your company is based, your 2020 taxes might be a little different.
“Remote work is definitely having an impact on people’s taxes, both during the pandemic and generally…even without the pandemic, there’s definitely a ton of tax implications when it comes to telework,” Loughead said.
“When an employee works in a different state than where their normal office is, for even a day, that can theoretically trigger tax liability in that state…even if that person is just on vacation and responding to a work email.”
Each state tax system has different rules that take into account how long an individual works there, what income is earned, and where the person’s true home is. Almost all states that have income tax have rules that impose them on workers who are only passing through. In almost half of the states in the country, the rules include people who are only passing through for one day.
While these rules are famous for affecting entertainers and athletes Michael Jordan and Alex Rodriguez, they could have very real implications for someone working in a different state due to coronavirus-related office shutdowns.
You might be thinking, how will my state know if I went to another state to do my work? There are various ways a state could find out this information, according to the Wall Street Journal. This information could be uncovered by employers asking employees and tax preparers asking clients about where they are working from.
Both employers and tax preparers might be able to treat a small amount of work as de minims, meaning it is too minor to merit consideration, but this is a judgment call. Signing a false return can put a tax preparer’s license at risk, and those filing their own should remember that tax returns are signed under the penalty of perjury.
What states plan to tax remote workers?
As of now, 13 states and the District of Columbia have agreed not to enforce their remote work tax rules for individuals that were present because of the coronavirus.
Below are the areas that have said they won’t tax remote workers due to the pandemic:
- District of Columbia
- New Jersey
- Rhode Island
- South Carolina
New York and California are still set to tax remote workers for 2020. New York depends on high earners for a large percentage of its income-tax revenue. In May New York Governor Andrew Cuomo announced that, unless the state received more federal aid, the state would tax the health workers who came from state to help fight the coronavirus pandemic.
In New York, the policy is that if an individual’s company has an office within the state, the state taxes the worker, even if they work remotely from another state. So far, the state has not made any announcements about changes to this policy.
Some locations, Maryland, Virginia, and the District of Columbia, have long had agreements with neighboring jurisdictions that allow commuters to file and pay tax where they live.
Could your income be taxed twice?
Working remotely from a state that is different from the one in which your company is based could lead to double taxation, according to Loughead. This possibility is one of the downsides to our federal system of government, she said.
While there are good things about the system, the states have the ability to create their own tax code which fosters interstate competition that is usually good for the taxpayer, this possibility of being taxed twice also exists.
“If each state’s doing its own thing, that can lead to double taxation of the same income if people travel around a lot for work and each state is trying to tax its portion,” Loughead said. “That can create a lot of complexity and double taxation.”
What is the “convenience” rule?
This rule is ly to affect thousands of New Yorkers and other individual’s whose offices were closed to the pandemic. The “convenience” rule says that if a person has a job that is based in one state but they live and work in another connivence rather than employer requirement, then the individual owes income tax to the state in which the job is based.
For example, if someone who holds a New York-based job lives and telecommuters from another state, they will still owe full income tax to New York that compensation. If the state in which they live also taxes that income, and doesn’t give a credit for the New York tax, the individual will most ly be double taxed.
Could you owe lower taxes for 2020?
Some remote workers might come out on top for 2020 and owe lower total state taxes for the year if they are in a low-tax or no-tax state. If an individual works from a state with no tax for several months, they could avoid being taxed on the income that they earn while working in that state.
What should you do if you think your 2020 taxes might be affected by remote work?
“It makes sense for individuals to talk to their employers before potentially teleworking from other locations, and I’m sure a number of businesses have now come out and notified their employees to be aware of this reality,” Loughead said. “But of course, right now businesses have so many different major concerns they’re worrying about so I wouldn’t be surprised if a lot of companies didn’t even realize this was happening and are slow to getting around to it.”
As these are more complex issues than normal, tax advisers are recommending that remote workers act soon to see how their 2020 taxes will be affected by this sudden change. Professionals should speak with their employers to discuss where state taxes are being withheld while they are working remotely.
Taxpayers should consider tracking the days that they spent working in different states. Tax auditors usually use cell-phone or credit-card records to track an individual’s work location.
It is important that you don’t file state returns that are inconsistent with these records, because doing so can lead to lots of money coming your wallet from the taxes due, interest, professional fees, and penalties for not getting your taxes right.
Jennifer Fabiano is an SEO reporter at Ladders.
Why many remote workers are facing a tax season nightmare
As we pass a full year since the pandemic’s arrival in the US, remote working has become a mainstay for corporate employees. A Gallup poll in April 2020 indicated that 51% of employees were entirely remote—a number that’s held relatively steady since. It’s now business as usual for our coworkers to be a few states away rather than just down the hall.
However, while this flexibility can be safer and more comfortable for many employees, remote work also can bring potential tax filing headaches for workers who took advantage of location options and headed to another state.
If you worked from a state other than your primary residence state for more than 183 days in 2020, you might have sparked dual residence status in those two states—making your income subject to taxation by both.
Even if dual residency status was not activated, you still may face paperwork and compliance hassles when you file your return.
Here are four key points to address if you spent time working in multiple states during 2020:
The vacation home dilemma
Working from a vacation home can trigger taxes in multiple states.
If a New York tax resident works from her Maine vacation home for a total of seven months during the pandemic, effectively crossing the 183-day threshold, both New York and Maine view her as a resident in each state. The result is double taxation, in which each state will impose a tax on all 12 months of her income for 2020.
Even if the remote worker did not cross the threshold of working for 183 days in the second state, double taxation is possible for whatever portion of time the worker was present in the state—depending on the state.
For example, if the same New York resident instead worked from a Colorado home for only three months in 2020, New York would tax her income for all 12 months, while Colorado also would tax three months’ worth of income for the time she spent working there.
The parent trap
If you moved home to live with your parents but kept your residence in your home state, you could incur double taxation.
While staying with your parents may have seemed a better location to work than from home, it still can prompt residency in that state on top of your primary state residency.
For example, suppose a young professional living in Connecticut stayed with his parents in South Carolina for 10 months during the pandemic.
If he still maintains his apartment in Connecticut, he is considered a resident of Connecticut. That opens the possibility of double taxation should South Carolina tax part or all of his income for the year. However, if he instead moved his apartment in Connecticut, he may be able to file as a part-year resident there and reduce the potential for double taxation.
The pandemic hero tax
Health care providers who answered the call to help in hot spots may be subject to tax in both their primary residence state and the state to which they traveled. For temporary disaster-relief workers, the rules vary by state.
Many states tax individuals for performing any services in a state where they are not a resident, while other resident states may provide a credit for taxes paid to a nonresident state. Still others consider disaster-relief workers exempt, and it certainly would seem so in this very particular case of the pandemic.
But the law is the law—subject potentially to any changes states may decide to legislate to remove this burden from relief workers.
As of now, if a nurse who lives in Ohio traveled to New York to work for six weeks last spring, New York will tax the nurse the total days worked in the state. But subject to limitations, the nurse can take a credit for those New York taxes on his or her Ohio return.
The COE rule
Beware: The convenience of the employer (COE) rule could take you by surprise. Six states implemented this rule before the pandemic, and it has become incredibly pertinent to the much larger-than-usual number of people working remotely last year. Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania all institute a COE test.
To date, the most assertive state enforcing the COE rule has been New York.
A cautionary example for the unwary: Take the case of a New Jersey resident who worked from her employer’s New York City office pre-pandemic but was forced to work from her New Jersey home during the pandemic.
The state of New York will ly assert the COE rule in this type of case and tax the wages earned as New York wages, ignoring the fact that the employee was forced to work from home in New Jersey due to the health crisis.
Because state rules can vary greatly and do not follow a practical or uniform approach, these issues do not offer one-size-fits-all solutions. For many, these rules will come as a surprise—something they never had to consider before the pandemic.
The potential for surprise and higher tax payments seems particularly cruel given the other challenges we’ve dealt with for the past year.
But for all these reasons—and the chance that there may be rule shifts during this tax season—a certified tax professional is the individual best equipped to provide guidance in sorting out your particular situation and providing support.
Martin Fiore is the US-East Region Tax Managing Partner at EY.
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If you left your home state to work remotely in 2020, there are tax implications to consider
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As it relates to office life, 2020 is the year of remote work.
Chances are you have a friend or coworker who left their home base amid the nationwide coronavirus outbreak to spend weeks or even months sheltering in a different state, whether with family or in some low-key locale. Maybe that person is you.
It's a privilege to be able to clock in from virtually anywhere, but where you live and work, even if it's temporary, matters for tax purposes.
If you've spent a significant amount of time or earned the bulk of your income while living in another state, it could cause an administrative headache during tax-filing season, at the very least.
At worst, you could owe income taxes to more than one state.
As is common with taxes, the rules aren't clear cut. If you're unsure whether time spent in a state you don't reside in could give rise to additional taxes, it's best to consult a tax professional well before the filing deadline next year.
A CPA will be able to help with your specific situation, but here are the general points to consider.
Establishing your state of domicile
Generally speaking, states run through two tests to determine whether someone's income will be taxed in their state, Lisa Greene-Lewis, a CPA and tax expert at TurboTax, told Business Insider. They need to know 1) a person's state of residence and 2) their domicile.
These terms might seem interchangeable, but the nuances are crucial. A domicile state is the permanent place you live — where you intend to return after a vacation, where you keep your bank accounts, where your physical possessions are located, etc. You're considered a permanent resident of this state.
A person can only have one domicile at a time, and it will generally maintain authority to tax all of their income, regardless of where they spend their time.
Considering your state(s) of residence
A person can have multiple states of residence outside of their domicile if they qualify under a state's residence rules. This can trigger additional income tax in some cases.
Many states consider an individual a resident if they spent 183 days (about six months) or more there in a single calendar year, Scott Hoppe, a CPA at Why Blu, a virtual accounting firm based in San Francisco, told Business Insider.
Other states might look at the share of a person's income sourced there and require them to file a tax return if it's above a certain amount, 50% of their total income, Hoppe said.
Ideally, employers would have kept tabs on where their employees were logging in from during the pandemic and recorded any address changes, but that's a tall task when operations teams are overwhelmed, he said. If a company did update an employee's address, their state withholding should change accordingly and collect income tax they owe to the state they're currently living in.
Relief for taxpayers who live and work in different states
Millions of Americans live and work in different states in normal times. As a result, there's a patchwork of tax schemes employed by states to collect their fair share of tax revenue, yet avoid overtaxing workers.
Temporary safe harbor
You may be relieved of double taxation by virtue of where you've temporarily relocated.
Due to the pandemic, 13 states are not requiring companies to withhold state income taxes for telecommuters who relocated temporarily, according to the Association of International Certified Professional Accountants.
The states are Alabama, Georgia, Illinois, Indiana, Massachusetts, Maryland, Minnesota, Mississippi, Nebraska, New Jersey, Pennsylvania, Rhode Island, and South Carolina.
For a person who falls under resident rules in two separate states, some states offer a tax credit — a dollar-for-dollar reduction of your tax bill — for the income tax levied by the state that is not their domicile.
Some neighboring states have reciprocity agreements to avoid double taxation for people who live and work in different states, Greene-Lewis said. It's common in the Northeast, where people often cross state lines to go to work.
In these arrangements, you'd be considered a nonresident in the state where you work, even though your income is sourced there, and a resident in the state where you live. You might be required to file both a resident return and a nonresident return.
What to do now to avoid a big tax bill
If your address has temporarily changed, let your employer know. They should be able to help sort out the tax withholding requirements that apply to the state the company is located in and the state where you reside, either permanently or temporarily.
It's also smart to consult a tax professional as soon as possible to identify which rules and relief may apply to you this year.