As if taxes weren't complicated enough, many remote workers will face a new challenge in 2021: state taxes. If you live in one state but you're working remotely from another, you may have to pay more income tax than you're used to. This isn't always the case—every state is different—but it's something you definitely want to be on top of. Let's take a closer look and see if this applies to you.
How Does Working Remotely Affect Taxes?
When you live and work in the same state, you have nothing to worry about: you can work remotely and your taxes will stay the same. Your tax situation gets more complicated, however, when you leave your residential state to work from another.
For example, let's say you live in New York, a state with notoriously difficult tax laws, but you decide to wait out the pandemic at your beach house in sunny California. In this situation, you'll still pay state taxes to New York, as you normally would, but now you'll have to file state taxes in California, simply because you worked in that state.
What Should You Do If You're Working Remotely?
If you're working from a different state, don't panic just yet. There are several things you can do right now to prepare yourself for tax season 2021.
1. Notify your employer.
First, contact your HR department (or your leader). It's very likely your employer has dealt with this issue before, and they can help guide you through the tax liabilities you might face.
2. Be aware of states that won't cause you any hassle.
Right now, thirteen states, along with the District of Columbia, have agreed not to tax remote workers during the pandemic. Below are the thirteen states that will treat remote work as if it was done in your residential state.
- Alabama
- District of Columbia
- Georgia
- Illinois
- Indiana
- Maine
- Maryland
- Minnesota
- Mississippi
- Nebraska
- New Jersey
- Pennsylvania
- Rhode Island
- South Carolina
3. Look for multi-state agreements.
Some states have reciprocal agreements with neighboring states that allow you to work there without filing taxes. In this case, you'll pay taxes in your residential state, not the state in which you're temporarily working. If your residential state has an agreement with your working state, ask your employer which special exemption forms you need to fill out.
4. Keep track of the days you work out of state.
Some states will tax you the minute you start working there. Others will give you a "grace period" of a few weeks or even a couple of months before the income tax kicks in. Whatever the rules are, keep an accurate count of the days you work in that state. When tax season comes around, you can report your days with confidence.
At this point, you may ask, "how would the IRS know how many days I'm working from another state? Couldn't I just guesstimate?" No—don't guesstimate. IRS's auditors are persistent and thorough. If you got audited, they're going to want an accurate number of days, not an estimate.
5. Take advantage of tax credits.
Working and living in different states has been a painful point for many people, even before the pandemic. So back in 2015, Congress decided it was unlawful for states to "double tax" workers who live in different states. Now, this may not apply to everyone (especially if you moved out of convenience rather than necessity) but getting a tax credit might be an option if you do face double taxation.
If you're working in a different state right now, make sure you understand how that state will treat your income. Will you have to file taxes in that state? Will you have to pay extra taxes? If so, go ahead and start putting money aside now. That way, you can focus on paying down debt in the future and not scrambling to pay off a hefty tax bill in 2021.
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