The pandemic resulted in a surge of remote work for millions of Americans, leading many companies to adopt telecommuting. Initially considered temporary, this shift has become long-term for numerous individuals. Consequently, employees may need to file tax returns and pay taxes in multiple states if their office and remote work locations are in different states.
Understanding state taxes for those living in one state and working remotely in another is complex due to each state's unique tax rules. These rules consider factors such as the duration of a worker's stay, earned income, and their primary residence or "domicile." While some states provide tax credits for wages paid to other states, others don't, or the credit might not fully cover the taxes paid. Non-wage income, like investments, is often subject to double taxation. As a result, remote workers could owe more, the same, or potentially less in taxes. Additionally, businesses might face an influx of tax-filing requirements even if the income paid to remote workers is relatively small.
Cathie Stanton, a member of the American Institute of CPAs who monitors state taxes on remote work, notes that several states implemented special tax provisions for remote workers during the pandemic, but many have since expired. States experiencing a significant exodus of residents to lower-tax states are attempting to retain connections with remote workers for revenue purposes. Stanton explains that states like New York and California have always been vigilant about tracking out-of-state residents, and now even lower-rate states like Virginia are challenging changes in residence. Remote workers living and working in different states should research the specific state taxes that may apply to them.
States can identify a worker's presence through employers and tax preparers, who both risk penalties for inaccuracies on tax forms. As a result, they will inquire about workers' or clients' situations to ensure accurate reporting. Individuals using commercial software for tax filing should remember that tax returns are signed under penalty of perjury.
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