2020 was the year for working remotely, and one of the more prominent questions in the 2020 tax season has to do with state income taxes. The question boils down to multiple states vying for your tax revenue relocation. Generally, you pay state income tax to the state in which you earned the income. For workers who are no longer commuting to a central office, the rules about where they’re earning that income become less clear.
Maybe you lived in the city, close to the office. When the pandemic hit and the office closed, leaving you to work from home, you started to question the need to live in the city. For many people, the realization that they could do their jobs from anywhere created an opportunity to move to a dream location without changing careers. Others had always commuted across state lines for work but then began to spend the workday in the state they’ve always called home.
If you started working remotely in a different state than the office location, you may be on the hook for filing a tax return in multiple states. If you spend a significant time working in a different state, we recommend you check in with your CPA to determine your obligation.
When it comes to state income tax for remote workers, what are the deciding factors?
There are two things that need to be taken into consideration when determining which state(s) can require you to pay income tax in 2020: your state of residence and your domicile. Your domicile is your permanent residence. This is where your physical belongings are located, where your kids go to school, your bank accounts reside, and where you cast your vote. These are the types of factors that will identify your state of domicile. Typically, you file taxes in this state.
Residency, on the other hand, is more fluid for many people. It’s possible for an individual to have multiple states of residence (think of snowbirds as a common example). This is where you could run into an issue when filing your taxes after working remotely in multiple states. Some states consider you a resident if you have spent more than six calendar months (183 days to be exact) in one place, while others will require you to file a tax return in the state if you have made 50% of your income in that state. New York requires employees who work there for just one day to file a state return. Every state is different, and it is important to be aware of the tax laws of the state in which you are working to ensure you’re filing correctly.
According to the American Institute of Certified Public Accountants, 15 states are not requiring temporary residents to pay state taxes due to the pandemic under temporary safe harbor. To aid individuals who have worked in multiple states since the pandemic, some states, specifically in the Northeast, have put reciprocity agreements in place.
Because each state varies, we strongly recommend keeping detailed records of where you spend your time. Record which days you work and how often in each state. You should also keep note of when/if you experienced state-mandated travel restrictions due to the pandemic. Keeping these records and sharing them with your tax preparer will help you to determine if you will need to file returns in multiple states.
Your CPA can assist you in determining if you have worked in states that have agreements in place to avoid double taxation. Although it is not uncommon for individuals to work in multiple states, due to the pandemic thousands more have been put in this situation and aren’t aware that they may owe additional states taxes. If you have questions related to your work situation in 2020, please contact us to schedule a consultation.