- As more Americans work remotely, those doing their job in other states may soon face the maze of income tax challenges.
- However, some industries, such as entertainment, have been dealing with state and local levy issues for years.
- Financial experts cover how to avoid a tax bill when working outside of a home state.
With the pandemic upending where Americans live and work, many now face the dizzying maze of income tax issues.
However, workers in some industries, such as entertainment, have been dealing with these problems for years.
Touring musicians, TV anchors, athletes, film crew and other entertainment professionals working throughout the U.S. have grappled with tax issues long before Covid-19, financial experts say.
Entertainers and sports professionals are often caught in the web of various state and local income taxes, said Chris Cooper, a certified financial planner at Chris Cooper & Company in San Diego.
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Typically, workers owe taxes in their home state, where they spend most of their time, own a home, register a car, vote and more.
When they work and pay levies elsewhere, some states have reciprocal agreements, which allow workers to avoid double taxation.
While New York and Los Angeles are still magnets for those working in entertainment, some professionals have moved to lower-tax jurisdictions, said Jason Moll, CPA at Jason Moll CPA, PLLC in Nashville, Tennessee.
For example, while there's a top levy of 13.3% in California, states like Florida, Nevada, Tennessee and Texas may be attractive because they are income-tax-free.
"I have had quite a few clients that have done that, even clients that are actors," Moll said. "They aren't filming year-round."
However, if a Los Angeles transplant moves to Nashville but still spends a lot of time in California, they may have trouble proving they are no longer a resident, Moll explained.
"Your credit card bills tell a pretty revealing story as to where you spend your time," said Robert Seltzer, CPA at Seltzer Business Management in Los Angeles.
Artists on tour or athletes working in multiple states throughout the year may have particularly complex tax issues. They need to report income to each state, pay levies and file non-resident tax returns.
"If someone is touring, then certain states will have their hand out," Seltzer said.
TV and film is another sector with a slew of temporary workers who may have income tax challenges.
"It really depends on what your source of income is," Seltzer said.
For example, let's say a California-based crew relocates to Georgia for a new production. Those workers must withhold Georgia levies and file a non-resident return, he said. However, they will receive a credit for the taxes paid on their California return.
"As a California resident, it really doesn't hurt them because the Georgia tax rate is lower," Seltzer said.
But if a Georgia-based crew worked in California, there may be a problem because they can't claim a full credit for higher California taxes paid on their Georgia return, he said.
In addition to state income-tax issues, entertainers may also get hit with city levies, Cooper explained.
There are local taxes in nearly 5,000 jurisdictions across the country, with many in states along the Rust Belt, such as cities in Ohio and Pennsylvania, according to the Tax Foundation.
"It doesn't matter if they're self-employed, a W-2 employee or they're a corporation," Cooper said. "These local taxing authorities can go after them because they're entitled to."
Cities with local levies include Detroit, New York, Philadelphia, San Francisco and St. Louis.
For example, Philadelphia's wage tax, one of the highest in the country, is currently 3.4481% for non-residents.
Here's the problem: Let's say an artist performs somewhere with city taxes. While many places offer a credit to avoid double taxes at the state level, the same write-off typically doesn't apply to city taxes, Cooper said.
"Your tax planning begins the day you step foot in another state," he said.
Those working in different places throughout the year will need a proactive approach to avoid trouble, Cooper added.
The American Institute of CPAs suggests keeping records of all remote work, including the number of days in each state and municipality.
When a client starts a new job, Cooper recommends checking the "single" box on an employer's tax form, even when they are married, to withhold more levies from each paycheck.
Moreover, if they worked in the same state last year, they may skip penalties by checking their previous tax return. As long as they withhold or make estimated tax payments equal to 100% of last year's net income tax, they won't incur penalties, Cooper said.
However, working in a new state may be trickier without a previous year's tax return. In those scenarios, someone may pull a blank tax return from their state's website and try to estimate levies based on the year's projected earnings, he said.
Of course, working with a tax professional may be the easiest way to calculate withholdings and avoid penalties, especially when someone works in multiple places throughout the year, Cooper said.
While established entertainers may have business managers to take care of these issues, newer performers may not have the same privilege, he said.
"They need to create their own form of representation," Cooper said. "The first person to start with is a tax professional."
The pandemic forced many Americans to work from home and some have temporarily set up remote offices elsewhere, exposing themselves to state tax issues.
In late 2020, about 30% of remote workers said they were doing their job in a different state than where they were before the pandemic, according to a Harris Poll for AICPA.
However, more than 70% of those surveyed didn't know telecommuting to another state may affect their taxes. While many states waived tax filing for temporary remote workers in 2020, those reprieves are lifting for 2021.
(This story has been updated to reflect a company name change to Jason Moll CPA, PLLC.)