Abby M Ferguson, CPA
With many companies either extending their remote work timeline due to COVID-19 or permanently switching to a remote work structure, it’s important for employees to understand the various tax implications of working remotely. Some people are taking the opportunity to travel or move to other states while they can work from anywhere. But establishing presence in additional states could cause additional tax filing and withholding requirements employees should be aware of.
UNDERSTANDING STATE FILING REQUIREMENTS
Tax filing requirements vary from state to state. If you’re planning on working remotely from a different state for an extended period of time, it is best to investigate the state’s tax filing requirements. Generally, employees pay taxes based on where they work or earn income. Employees could be subject to additional non-resident income tax return filings depending on the state they’re in and whether they meet thresholds based on income generated or time spent there. So, while taxpayers may maintain their permanent home in one state and work remotely from a different state, depending on how long they work or how much income they earn in that different state will determine if they are required to file as a non-resident of said state.
CALIFORNIA AND NEW YORK STATE TAX EXAMPLE
A California taxpayer decides to move from California back to New York to be near family while they are working remotely. The taxpayer signs a short-term lease and works remotely in New York for six months.
Assuming the taxpayer spent 184 days or more in New York, the taxpayer is now required to file a part-year resident return for both New York and California. New York requires taxpayers who spend 184 or more days in the state during the year to file in New York, whether or not the taxpayer maintained a permanent residence there.
MISSOURI AND ILLINOIS STATE TAX EXAMPLE
An Illinois resident works remotely on a temporary basis from their home for a Missouri-based company. The employee does plan to go back into the Missouri office once COVID-19 is over.
Historically, the Illinois resident has worked and earned their wages in Missouri, so they were required to file a non-resident return in Missouri and pay the tax due there. Additionally, they would file an Illinois resident return as well, where they would have to calculate and pay tax due in Illinois. Please note, Illinois does allow for a credit for taxes paid to other states in their calculation of current year tax, so this helps avoid the double taxation between Missouri and Illinois.
Now in this example, the employee worked remotely from their home for a significant portion of the year. This means their work performed is in Illinois instead of Missouri which would lead us to believe that the income sourced to Illinois would not be subject to Missouri income tax. Unfortunately, Missouri currently has not provided clear guidance on this situation. It is believed that even though the Illinois resident performed services in Illinois, Missouri will still want that Illinois resident to file and pay tax as a Missouri non-resident since the change was on a temporary basis and due to the COVID-19 pandemic. Time will tell if this stance will hold true though.
Filing requirements vary by state, so it’s important to keep track of which states you have been working remotely in and for how long. Find out how working from home affects state taxes in Missouri and Illinois. If you have specific questions on a particular state filing requirements, contact an Anders advisor below.