• More than half of adults who worked remotely during the pandemic are unaware that they could face tax consequences because they didn’t update their tax withholding to reflect their new location, a study by the American Institute of CPAs found.
  • People working from different locations could find themselves on the hook for non-resident state taxes when filing next year.
  • Track your locations and the length of time you’ve spent working in other states. You may need to adjust your state tax withholding.

If you worked remotely from a different state while waiting out the pandemic, you just might wind up facing a tax surprise when you file next year.

That's because the longer you work away from your home base, the higher the likelihood you could have tax reporting and payment obligations in your temporary location.

Indeed, more than half of remote workers polled by the American Institute of CPAs said they were unaware that they could face tax consequences if they didn't adjust their state tax withholding to reflect their work situation.

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Further, more than 7 out of 10 of the remote workers were unaware that telecommuting from a different state could affect the amount of state taxes owed, the institute found.

The organization polled 2,053 American adults in October.

"If you're working in multiple states during the year, it causes complexity," said Eileen Sherr, CPA, director for tax policy and advocacy at the AICPA.

"When these people file, they will owe money if they haven't had any tax withholding in that state, so they need to change their withholding, so they don't have a big payment in April," she said.

Multiple states, multiple obligations

If you work in one state, but reside elsewhere, you might be on the hook for taxes in both locations.

States often have established workarounds to help mitigate the complexity for these taxpayers.

For starters, some states have reciprocity agreements to keep workers' income from being taxed twice. New Jersey and Pennsylvania have such an accord. There's a similar pact between Maryland, Pennsylvania, Virginia, West Virginia and Washington, D.C.

Other states may offer a credit to soften the hit from double taxation. This is the case in Connecticut, which allows a credit to residents paying income taxes in other states — namely those who commute to jobs in New York.

Further, seven states tax teleworking employees based on where their employer's office is located. This is known as the "convenience of the employer" rule, according to the Tax Foundation.

Many times you have to indicate to your employer where you're working.
Dina Pyron
partner at Ernst & Young and global leader of EY TaxChat

Those states are Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York and Pennsylvania.

Massachusetts joined that list this spring, when it put in place an emergency rule that would tax out-of-state workers who used to commute to the Bay State.

Further complexity is ahead for people who might be staying in a state where they aren't a resident and continue to telecommute. This is how people end up filing two or three state tax returns.

If you're earning money in a state where you're not a resident, you could be required to file a non-resident tax return there, as well as pay taxes.

"Different states have different rules for when you need to file," said Sherr.

For instance, employers must start withholding state taxes if an employee has been in Arizona for more than 60 days. Meanwhile, employees who work in New York even one day are required to file a return, according to the Mobile Workforce Coalition.

See here for the coalition's list of states and applicable filing and payment rules for nonresidents.

As tempting as it may be to keep quiet about your location, states have different ways to sniff out taxpayers who aren't paying their dues.

"States would know from the Form W-2 and withholding if the employer is aware of the location of the employee working," said Sherr.

"It is also possible that states could audit the taxpayer and ask for documentation, like credit card bills, cell phone records and utility bills," she said.

Get ahead of the problem

It's November, but that doesn't mean it's too late to get ahead of your tax obligations for the 2020 tax year.

Start by letting your employer know that you've been working from a different state, so that you can make sure your state-level withholding is accurate.

"Many times you have to indicate to your employer where you're working," said Dina Pyron, partner at Ernst & Young and global leader of EY TaxChat.

"Many companies will have triggers," she said. "You've been working there this long, so we'll turn on the state withholding and state taxation as you're a non-resident and you'll have a requirement to file there."

Prepare your recordkeeping, too. That means you should pull together a list of states in which you've been working remotely during 2020 and track the amount of time you spent there, according to the AICPA.

Be specific about your location. Cities and counties can levy income taxes, too.

Don't go it alone. Talk to your tax professional ahead of time to make sure you don't wind up with a surprise tax obligation next spring.

"Dual state filing is complex," said Pyron of Ernst & Young. "In general, people look at this and say, 'I don't know how to file in multiple states and get the right offsetting credits.'"