Working Remotely: Possible Income Tax Withholding Implications

By Terry C. Barrett, CPA, Tax Senior Manager | State and Local Tax Team Leader

State Tax Considerations for Working Remotely During COVID-19 Pandemic

Working remotely has become the new norm for many people due to all the various issues created by the COVID-19 pandemic. For some, the remote work location (typically at home or possibly in another family member’s home) may be in a state different from where they normally worked. This has raised the question of possible changes in state income tax requirements, namely will working in a state other than where one traditionally has worked due to a pandemic create an income tax withholding and tax filing requirement in that other state?

Remote Work State Withholding Requirements Pre and Post COVID-19

As the states have extended 2019 tax filing due dates, addressed late filing interest and penalties, some, too, have addressed the remote work impact on income tax withholding requirements. States generally require the withholding of income tax based upon where the work is performed, with limited exceptions such where border states have reciprocal agreements whereby they agree to not tax the income of the residents of the other state as in a “you-don’t-tax-my-residents-and-I-won’t-tax-yours” situation. For most individuals, the state withholding requirement is the same state as where they reside; for others, this may be a border state, or multiple states if the work required frequent travel.  States can and do require withholding of their own state’s income taxes for nonresidents frequenting the state for work purposes, but the rules vary. Example pre COVID-19, a consultant who routinely works in many states likely has to report to their payroll department where they work each day so the company can allocate wages to the various states and then withhold the income tax from such states. Employees must then file in the various non-resident state and claim a credit back in their home state. The same is true of professional athletes who play in many states; the pay involved is just much higher.

Some state tax agencies have announced that working remotely during the proclaimed state of emergency due to the COVID-19 pandemic will not have an impact on income tax withholding, provided employees return to their previously normal workplace/state before the end of the emergency period. Some states have clarified that if an individual typically worked in another state and had taxes withheld for that state, the fact that the individual may not be working in that state during the pandemic does not change the withholding requirement. Most states, however, have been silent on the issue, leaving taxpayers to question whether they will have the proper withholding for the right state come “tax time.” In addition, it is noteworthy that some states may not require employers to delve into the specific state withholding requirements for their employees working remotely and be responsible for withholding the proper state taxes but rather place that burden on employees.

Thus, if you find yourself in a situation where you have had to work remotely and from a state other than the state for which you typically have had taxes withheld, you may find you have different income tax filing requirements. In addition, if you anticipate staying in the remote work location longer than the home state’s proclaimed state of emergency, or if you decide that permanent relocation is most appropriate for you, you may need to research your income tax withholding responsibilities or reach out to your Keiter Opportunity Advisor or Email | Call: 804.747.0000. We are here to help.

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