During the COVID-19 pandemic, remote work has become common for many companies. What once was a relatively small percentage of remote workers has drastically increased. A recent survey found that many new remote workers are unaware of the potential state tax implications of working in a state or states different from where their company is located.
On behalf of the American Institute of CPAs® (AICPA®), The Harris Poll surveyed 2,053 U.S. adults in October. Among the 58% of Americans employed, 42% have worked remotely during the COVID-19 pandemic and 25% were currently working remotely. More than half (55%) of those working remotely during the pandemic were unaware that failing to change their state tax withholding to reflect their remote work situation could have tax consequences.
The AICPA survey found that of those who have worked remotely during the COVID-19 pandemic,
47% were unaware that each state has its own tax laws related to remote working;
71% were unaware that working from a different state than their employer’s physical location can affect the amount of state taxes owed; and
54% were unaware that the number of days worked out of the state where their physical workplace is located may also affect the amount of state taxes owed.
When asked if their state has state income tax reciprocity with any other state, 42% were unsure.
Among those working remotely who have worked in a state other than their pre-pandemic physical workplace, many have done so across multiple states (on average three) for relatively short periods. Most of these remote workers (75%) have worked out of state for 60 days or fewer and 51% have worked out of state for fewer than 30 days total.
The survey also provided some optimistic results. It noted that 67% of those who have worked out of state notified their employer of the state where they were working, 51% have tracked the number of days worked in each state and 41% have changed their state income tax withholding.
The AICPA recommends remote workers take six steps to prepare for the 2021 tax filing season:
Compile a list of any states where you have worked remotely during 2020.
If you didn’t track the number of days worked in other states, try to approximate the number of days worked in each state.
Cities, counties, municipalities, school districts or other jurisdictions may also levy income taxes, depending on the state. Make sure you also track this level of detail.
Consult a CPA. You will likely have questions about how and where to file state taxes. A licensed CPA can help navigate those questions and effectively manage your state tax liability.
Check your state tax withholding and make any needed adjustments. If you don’t have the correct state tax withholding, you may owe state taxes, interest and penalties when you file your taxes.
Continue to keep a record of all jurisdictions where you have worked remotely.
It’s important to look back and ensure that you take the necessary steps to avoid a surprise tax bill in the 2021 filing season.