Working From Home Has Tax Impact For Staff

Let’s say you live in New Hampshire, you work at a nonprofit in Massachusetts and due to COVID are working from home. Or, maybe you live in New Jersey and are forced to remotely work for your New York City-based nonprofit.

You saved on commuting costs. But if you didn’t have your tax withholding adjusted, you could be so screwed.

More than half of Americans who have worked remotely during the pandemic (55%) are not aware of possible tax consequences from not changing their state tax withholding to reflect their remote work location. And, fewer than half (46%) are aware that the number of days they worked out of the state where their physical workplace is located may impact the amount of state taxes owed.

A survey of 2,053 U.S. adults conducted in October by The Harris Poll on behalf of the American Institute of CPAs (AICPA) showed that among the 58% of Americans currently employed, 42% have worked remotely during the COVID-19 pandemic and 25% are currently working remotely.

The survey also revealed that more than half of those who have worked remotely during the pandemic — 55% — were not aware that a failure to change their state tax withholding to reflect their remote work situation could result in tax consequences.

“Working remotely can have tax implications that vary from state to state,” according to AICPA Director for Tax Policy & Advocacy Eileen Sherr, CPA, CGMA. “The sudden and unplanned increase of many employees working remotely due to the pandemic has left many of them unaware of their current state tax liabilities and any additional steps they need to take now and at tax filing time.”

When asked if their state has state income tax reciprocity with any other state, 42% of Americans were unsure. Among those currently working remotely who have worked in a state other than where their pre-pandemic physical workplace was located, many have done so across multiple states (on average three) for relatively short periods of time. Most of these remote workers – 75% – have worked out-of-state for 60 days or less, and 51% have worked out-of-state fewer than 30 days total.

The survey also provided some optimistic results, noting that 67% of those who have worked out-of-state notified their employer of the state they are working in; 51% have tracked the number of days worked in each state, and 41% have changed their state income tax withholding.

“Some remote workers are taking the right steps – notifying employers, tracking days and changing state tax withholding – but there are still too many that are not taking action, likely because they are not aware they should be,” said Sherr. “Failure to take these steps could mean an unpleasant surprise at tax time in 2021. Remote workers should take steps now to track their remote work and try to educate and prepare themselves for what the upcoming tax season might mean for them. I strongly urge taxpayers to talk with a CPA now about their situation.”

The AICPA recommends remote workers take the following to prepare for the 2021 tax filing season:

  • Compile a list of any states you’ve worked remotely in 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.
  • Depending on the state, income taxes may also be levied by cities, counties, municipalities, school districts or other jurisdictions. Make sure you also track this level of detail.
  • Consult a CPA – taxpayers 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 – make any adjustments that are needed. If you do not have the correct state tax withholding, you may owe state taxes, interest and penalties when you file your taxes.
  • Going forward, continue to keep a record of all jurisdictions in which you work remotely.