Many people who suddenly ended up working remotely during the pandemic in 2020 found themselves plopped at their kitchen table in front of a laptop.
But more people than you might imagine hit the road and worked out of someone else’s kitchen or spare bedroom, maybe visiting a relative or a summer home, in another state.
So what happens now at tax time?
“Working remotely in another state may — and often does — subject the individual to tax in that state,” said James O’Rilley, CPA and tax director for Doeren Mayhew in Troy. And sometimes, it could even drive up your overall tax bill, O’Rilley said. If a higher tax rate is paid to the state where a Michigan resident is working remotely, for example, you could get a tax credit in Michigan but that credit is only limited to Michigan’s state income tax rate of 4.25%.
State tax rules for remote workers vary
Many people have absolutely no idea that each state has its own state tax laws relating to working remotely. Seven out of 10 people polled by the American Institute of CPAs did not know that working remotely in other states could affect the total amount of state taxes they owe. And slightly more than half did not know that the number of days worked out of the state where their physical workplace is located may also impact the amount of state taxes owed. “Your tax situation is probably a lot more complicated in 2020 than in the past if you have been in multiple states,” warned Eileen Sherr, director of tax policy and advocacy at the American Institute of CPAs in Washington, D.C. Roughly 30% of those working remotely last year said they had worked in another state that was outside of where their office or business is located, according to a survey by the American Institute of CPAs. The poll surveyed 2,053 adults in October. The same percentage worked in a state other than where they lived. The survey, prepared by the Harris Poll, noted that 42% worked remotely, including those who worked in their own homes, during the COVID-19 crisis.
Strangely enough, some people even worked in three or more states, perhaps taking their work along as they traveled to be with other family members across the country. About half the people did not track the number of days that they worked out of state; and nearly 60% did not change their tax withholding in their home state.
Bad news: You could owe taxes if you didn’t have taxes withheld outside your home state — or the state where you used to work — if you worked elsewhere.