AICPA to remote workers: Check your state withholdings 

The American Institute of CPAs has a warning for workers who have been operating from a home office for the past seven or eight months — check your tax withholding. Depending on the state where they work, failing to change their withholding based on their new work situation could have a serious impact on how much state income tax they owe.

Related: Employers prepping for long-term remote work

“Working remotely can have tax implications that vary from state to state,” according to Eileen Sherr, CPA, CGMA. Sherr is AICPA’s director for Tax Policy & Advocacy and a state tax expert. 

“The sudden and unplanned increase of many employees working remotely due to the pandemic has left many of them unaware of their current state tax liabilities and any additional steps they need to take now and at tax filing time,” Sherr said in a statement. 

AICPA surveyed over 2,000 Americans to evaluate how many of them might be affected by working remotely. It found that of the 58% of respondents who are currently employed: 

• 42% have been working remotely 
• 47% weren’t aware that different states have different tax laws related to remote work 
• 42% weren’t aware if their state has income tax reciprocity with any other state, which would allow them to only pay state taxes where they live

With the complexity of tax laws, especially for employees who live and work in different states, it’s not surprising that large majorities aren’t aware of how their tax obligations might be affected. AICPA found 71% weren’t aware that working remotely in other states from where they live can impact how much they owe in state income taxes. That’s a problem, as the survey found employees with interstate business have worked in an average of three states for at least some time during the pandemic. 

Furthermore, 54% of respondents weren’t aware that the number of days they work in other states affect how much they owe in state income taxes. 

AICPA suggested some ways advisors can help clients manage this likely unforeseen burden. 

1. Compile a list of any states where they’ve worked remotely during 2020, and the number of days (or an approximation) that they worked in each of those states. 
2. Track the cities, counties, municipalities, school districts and any other jurisdictions where that work was completed, as they may levy their own income taxes. 
3. Make any changes to state tax withholding right away. Workers who don’t may owe interest and penalties on top of increased taxes when they file.

READ MORE: 

• 10 tax planning steps to take before New Year’s Eve
• Redefining compensation strategies in the remote work era
• Tax implications of telecommuting for employers and their employees

Danielle Andrus is a writer and editor based in Denver. She can be reached at danielle.andrus@gmail.com.