- March 10, 2021
- Tax Preparation
A year ago this month, a great many of us were sent home from our workplaces as a result of the pandemic and told to stay there until further notice. For some of us — for example, folks living in the Lake Tahoe/Truckee area in California who would usually commute to work in Reno — this meant that last year you worked in two states … or more. In fact, one positive result of the pandemic coming to realize that we really could work from anywhere, and many of us did. But it could affect your taxes.
It doesn’t matter whether you were in your own home or a vacation rental, a friend’s guest room, a hotel, or a conference room, nor does it matter whether you sat on your couch and Zoomed in or visited a client at their place of business. If you were a remote employee in 2020 who received a W2 (or, in some cases, if you’re self-employed), this applies to you. And it likely will in 2021 as well.
Prior to the pandemic, it may have escaped your notice that every state has its own rules for how long a person can perform work in that state before you owe state taxes. In fact, 7 out of 10 workers don’t know this, according to a survey by the American Institute of CPAs.
In fact, the U.S. is comprised of a patchwork of state tax policies that can be extraordinarily difficult to navigate, and, to be frank, difficult to enforce. The federal government did make a move to address this last summer, but so far it has gone nowhere. This leaves policies up to individual states, many of whom are really hurting as a result of the pandemic shutdowns.
In some of the most tax-friendly states — Illinois and Hawaii for the win! — employers don’t need to start withholding state income taxes until employees have been in those states for more than 60 days.
Still other states have reciprocity agreements with neighboring states to avoid taxing workers’ income twice. And another group of seven states follow the “convenience of the employer” rule that only taxes telecommuters based on where their employers are based.
Meanwhile, in the least-friendly states (I’m lookin’ at you, New England and Midwestern states!), employers are expected to withhold taxes on the very first day the employee works within the state.
Fortunately, Nevada imposes no state income taxes, but where does California land on this list? Unfortunately, The Golden State is ranked as “unfriendly” to remote workers, charging income tax according to a wage-based threshold. Earn $100 or more while in the state and you’re on the hook for state taxes.
Bottom line: In the worst-case scenario, a remote worker who found themselves in a few different states last year could wind up owing state taxes in multiple states. Kinda makes the idea of driving across the country and working from an RV less appealing, doesn’t it?
My best advice is to get out in front of the issue. If you haven’t kept track of it, start now. Sit down, as soon as possible, and write out where you spent time working throughout 2020. What did you do and how long were you there? Did you move out of state during 2020? How did this affect the dates when you were employed — or did it? Then make an appointment with your CPA to figure out how to approach the issue. You should also discuss this with your employer to be clear how they have been handling it.
But here’s the good news: It’s hard to enforce. In my opinion, it’s almost too hard to be compliant with all the various state requirements, and my thinking is that even the most tax-unfriendly states will have a hard time collecting taxes from the millions of workers who went remote in 2020.
If you’re an employer with payroll, the rule has typically been that for employees who live out of state (for example, they live in Truckee and work in Reno), the employer must register as a business entity and pay payroll taxes in that state. For Nevada companies with employees in California, this involves an annual $800 tax requirement, all because you have at least one employee who lives in California. Approximately one-third of states have issued guidance providing for a temporary suspension of that requirement; this includes California, which currently has not specified an end date to this suspension, which is a big help to employers who have been hit by pandemic losses.
But while states have made an effort to ease the compliance burden on employers, they have not done so for workers, who are still expected to report wages earned in other states and file different state tax returns, even though employers have not earmarked wages as belonging to those states.
Before you panic, talk to your employer and your CPA and learn what the requirements are for any state in which you’ve worked. Here at Ludmila CPA, we’re happy to strategize with you to determine your next steps. My expectation is that states will continue to address this issue as remote work becomes more the norm than the exception, and I hope state governments will realize the futility of imposing such a broad compliance burden on workers. This area of the law is in flux, so keep an eye on regulations frequently. We’re also happy to have our clients send updated lists of employees working in various states so we can do frequent status updates on your situation.
As always, we want to help your tax season go as smoothly as possible, so let us know how we can help. Happy filing, and happy spring!