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If you’ve been working remotely at some point this year, you might want to assess what that might mean for your 2021 tax return.
While many states offered a pandemic-related reprieve that typically did not result in any tax reporting obligations for people who were temporarily working in their state, the leniency was around 2020 returns. Now those compliance breaks are gone.
“As emergency orders are lifted, directions change,” said Eileen Sherr, director of tax policy and advocacy at the American Institute of CPA. “Some states are lifting them now.”
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Of those still doing their remote work at the end of 2020, about 30% said they worked in a different state from where they had lived and worked before the pandemic, according to a survey conducted by the Harris Poll on behalf of the ‘American Institute. of CPAs. Most respondents (72%) were “very” or “not at all” aware of their state’s tax requirements for remote working.
It can be complicated. Different states have different approaches to when they expect you to report income earned there. And the rules don’t necessarily mean you’ll pay more tax overall, as most states offer a tax credit to eliminate double taxation (although that isn’t always the case).
“The # 1 concept that an individual who works remotely should know is that no matter what state you reside in, you should tax your pay no matter where you earned it,” said CPA Michael Bannasch, responsible for national and local tax practice. with RKL, an accounting and consulting firm.
However, he said, you could have a tax liability in another state if you earn money or work there or if that’s where your business is located, depending on the states involved.
For example, some states allow non-residents to work there for more than 30 days without a withholding tax requirement, including Arizona and Hawaii, which allow you to stay there for up to 60 days.
Thresholds for other states come into effect faster, including 23 that want you to pony from day one. And still other states have a payroll tax threshold, while nine states have no income tax.
Some states have reciprocal agreements between them. Basically, if your state of residence has this pact with the one where you work, you won’t have to pay in both jurisdictions. For example, if you live in Maryland but work in the District of Columbia, you only need to worry about withholding tax for Maryland.
Meanwhile, there are also a handful of states – Connecticut, Delaware, Nebraska, New York, and Pennsylvania – that impose an “employer convenience” test for remote workers. If your business is located in one of these states, you will usually pay taxes there, unless your remoteness is because your employer needs you to relocate.
“In these states, if your reason for working [remotely] Just because your business requires it, doesn’t mean you will have to pay taxes to the state where the employer is located, ”Sherr said.
For remote workers, all of these different rules mean it’s important to know the state laws that will affect you. Getting the right to the deduction from your paycheck is usually a shared responsibility between you and your business, Bannasch said.
“Because an employer can be penalized by a state for not having withheld when it should have, the employer has an incentive to put in place policies for where its employees work,” Bannasch said. “But, of course, these policies are only as good as the level of employee compliance.”
Also, if you are an independent contractor for your business – you don’t receive a W-2 form, but rather, say, a 1099 form – you are considered self-employed and taxed as such.
This means that you are responsible for determining which states you owe taxes to, based on where you live and where you were when you earned the money. However, Bannasch said, the calculation is not based specifically on time spent in different states, but rather on a combination of the amount earned in those states as well as other factors (i.e. whether you have employees who work for you and your bottom line).
It is possible that the taxation of remote workers will change at some point, given the growth of the country’s mobile workforce. A bipartisan bill in the Senate, the Remote and Mobile Worker Assistance Act, 2021, would not let states impose or require a withholding on non-resident employees who are in a state for less than 30 days (for this year, it would be 90 days). A similar measure is pending in the House.
Another Senate bill (with a a related in the House) would limit the ability of states to impose the “employer convenience” rule on non-residents. Additionally, some states are changing their rules – that is, how long a person can work there without being taxed – to be more accommodating with remote workers.