Susan Tompor Detroit Free Press
WWR Article Summary (tl;dr) Throughout 2020 many people were working remotely out of state. What does that mean for your taxes this year? For some, it could mean having to file a few state income tax returns.
Many people who suddenly ended up working remotely during the pandemic in 2020 found themselves plopped at their kitchen table in front of a laptop.
But more people than you might imagine hit the road and worked out of someone else's kitchen or spare bedroom, maybe visting a relative or a summer home, in another state.
So what happens now at tax time?
"Working remotely in another state may — and often does — subject the individual to tax in that state," said James O’Rilley, CPA and tax director for Doeren Mayhew in Troy, Mich.
And some times, it could even drive up your overall tax bill, O'Rilley said. If a higher tax rate is paid to the state where a Michigan resident is working remotely, for example, you could get a tax credit in Michigan but that credit is only limited to Michigan’s state income tax rate of 4.25%.
State tax rules for remote workers vary
Many people have absolutely no idea that each state has its own state tax laws relating to working remotely.
Seven out of 10 people polled by the American Institute of CPAs did not know that working remotely in other states could affect the total amount of state taxes they owe.
And slightly more than half did not know that the number of days worked out of the state where their physical workplace is located may also impact the amount of state taxes owed.
"Your tax situation is probably a lot more complicated in 2020 than in the past if you have been in multiple states," warned Eileen Sherr, director of tax policy and advocacy at the American Institute of CPAs in Washington, D.C.
Roughly 30% of those working remotely last year said they had worked in another state that was outside of where their office or business is located, according to a survey by the American Institute of CPAs. The poll surveyed 2,053 adults in October.
The same percentage worked in a state other than where they lived. The survey, prepared by the Harris Poll, noted that 42% worked remotely, including those who worked in their own homes, during the COVID-19 crisis.
Strangely enough, some people even worked in three or more states, perhaps taking their work along as they traveled to be with other family members across the country.
About half the people did not track the number of days that they worked out of state; and nearly 60% did not change their tax withholding in their home state.
Bad news: You could owe taxes if you didn't have taxes withheld outside your home state — or the state where you used to work — if you worked elsewhere.
When state taxes kick in can be shocking
States have inconsistent rules, so things can get really complicated, very quickly.
For example, if you are a Michigan resident, all of your income is subject to Michigan tax, no matter where it is earned. Some exceptions exist including for self-employed taxpayers who are starting a business.
And here's a real shocker: Some states, including Michigan, require someone who is not a resident to pay state income taxes on the first day the employee starts working remotely in that state.
So if your home state is Georgia but you worked even one day out of a cabin in Northern Michigan last summer, you'd owe Michigan state income taxes. "It's a gotcha waiting to happen," said Maureen Riehl, partner with MultiState Associates, and executive director for the Mobile Workforce Coalition.
The coalition, which has the support of the Michigan Chamber of Commerce, Masco and 400 others, wants states across the country to enact a uniform 30-day threshold for personal income tax withholding and return filing requirements for out-of-state residents.
A business coalition in Illinois led the effort to enact a 30-day mobile workforce standard that took effect in 2021. The idea is that if there's a 30-day window, your employer and you can better adjust and prepare for the state tax obligations and requirements.
There are 41 states that have a state income tax and more than 20 of those states have a one-day rule for owing state income taxes if you travel there to work or work there remotely, Riehl said.
Technically, you'd be on the hook if you went to that state for work to attend an industry convention. Some exemptions exist including for long-haul truck drivers, airline pilots, professional athletes, entertainers and others. Riehl said some states, such as New York, have grown increasingly aggressive about trying to track down who is working remotely in New York and who owes state income taxes.
"Obviously," she said, "there's a lot of non-compliance."
But states are getting more sophisticated about how to track down those who owe state income taxes.
A vote in the U.S. Senate this year indicated support for legislation that would create a federal standard to simplify how employees who work across state lines would pay state income taxes. Legislative supporters are continuing to look at avenues to include a mobile workforce fix in some other must-pass legislation.
What do you need to consider at tax time?
No across-the-board tax advice exists for how state income taxes must be handled if you worked remotely in another state during the pandemic. Some existing rules are in place, though, that offer some clarity, again depending on the states.
There are 16 states that have agreements that make it easier for those who commute across state lines to only file and pay taxes in the state where they live.
Michigan has long had such an agreement with various states to avoid taxing income in two states. The states with such an agreement with Michigan are: Illinois, Indiana, Kentucky, Minnesota, Ohio, and Wisconsin. But what if you worked remotely in another state? You're going to have to check the rules there. Working out of your condo in Florida, if you live in Michigan, isn’t likely to cause tax headaches since Florida doesn’t have a state income tax.
But some other states, including New York, will tax income earned in that state even if the person primarily resides and works in another state. And six states tax those working remotely based on where their employer’s office is located if the remote work is not required by the employer at a genuine work location. They are: Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania.
The AICPA has a state tax COVID guidance chart online to detail the various requirements. See www.aicpa.org and search state guidance.
In some cases, Sherr said, remote employees are still taxed in the state where the employer is located unless the employer actually requires remote work in another state. It's not based on where it was convenient for you to work.
Working remotely elsewhere could mean that you end up having to file a few state income tax returns. But the arrangement might not trigger higher taxes overall, depending on the states.
Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting, said 18 states and the District of Columbia have adopted a specific COVID-19 exception that can help employers. The states are Alabama, Georgia, Indiana, Iowa, Maryland, Massachusetts, Minnesota, Mississippi, New Jersey, North Dakota, Pennsylvania, Rhode Island, South Carolina, Vermont, California, Maine, Oregon and Wisconsin.
The COVID exceptions are designed to protect the employer from being taxed in the state when the employer has no other presence there other than the temporary presence of an employee due to the COVID pandemic. The employee might still have a tax liability in that state, depending on the rules.