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Working Remotely in a Different State: Filing Taxes

For remote workers, having to prepare taxes for 2020 can be a daunting task. Learn more about the potential tax implications of working remotely in a different state.

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Justworks
Apr 29, 20214 minutes

As if remote workers didn’t have enough to worry about this past year, having to prepare taxes for 2020 probably adds to that list. And what a lot of remote workers might not know is that they might be responsible for state income taxes in the state where they live and work, regardless of where their company is located.

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This becomes even more complicated for employees who have residences in more than one state, as well as for those who ordinarily work in-office but spent a portion of 2020 working remotely due to COVID-19. For many of those employees who started 2020 working in an office, they were likely more concerned with figuring out how to keep working rather than potential tax implications. However, it’s time to pivot from the logistics of remote work to taxes and remote work.

Related State Income Tax Concerns

Did you know that, as a remote worker, you need to consider related state tax implications? If the answer is no, you’re not alone. In fact, many people were unaware of this, according to a recent American Institute of Certified Public Accountants (AICPA) survey.

If you worked remotely in a different state, you may need to file and pay state income taxes in that location.

What some people don’t realize is that income tax requirements vary significantly by state. What does this mean for remote workers? If you worked remotely in a different state, you may need to file and pay state income taxes in that location.

Many Variables to Consider

There isn’t a simple, one-size-fits-all answer to how to file taxes if you worked remotely in a different state, because so many variables impact taxation:

  • There are nine states that don’t have a state income tax on earned wages: Alaska, Florida, New Hampshire, Tennessee, Texas, South Dakota, Washington, Wyoming, and Nevada.

  • Several states have reciprocity agreements with each other, which may limit taxation to the state in which one lives rather than the state where one works.

  • In other states, specifics vary greatly about the circumstances under which part-year residents or nonresidents are required to file or pay state taxes.

  • Some cities, counties, and municipalities have income tax requirements above and beyond state requirements that you’ll need to consider.

Taxes and Remote Work in a Different State: A Scenario

Sarah ordinarily lives and works in Texas, a state that does not have a state income tax. During the pandemic, she’s assigned to work remotely. Since she doesn’t have family in Texas, she decides to stay with relatives in Alabama, departing just before the lockdown starts. She stays in Alabama for four months, working remotely while she’s there.

Alabama does impose state income tax, even for part-year residents. Depending on her filing status and how much money Sarah earned while working remotely in Alabama, she may need to file and pay Alabama income tax as a part-year resident of that state. If she didn’t update her payroll paperwork with her company to show her Alabama address, her W-2 won’t reflect this. However, this does not impact whether she has a personal obligation to file and pay taxes in the state of Alabama.

Some cities, counties, and municipalities have income tax requirements above and beyond state requirements that you’ll need to consider.

This scenario would get even more complicated if Sarah left Alabama and worked in another state for a few months before returning to Texas. If that other state imposes state income tax, then she may also need to file and pay state income taxes in that state for the portion of her income she earned while she was there.

Preparing to File Taxes as a Remote Worker

Income tax laws vary so much from one state to another, so if you worked remotely in a different state (or multiple states), your taxes might be too complicated to file on your own this year. Even if you usually prepare them yourself, you might find it helpful to enlist the services of a certified public accountant (CPA) or another credentialed tax preparer.

Whichever route you go, you’ll need to provide information about all of the places you lived while working remotely throughout the year, along with other relevant tax paperwork. Compile a comprehensive list that includes:

  • States, cities, and counties where you worked remotely during 2020

  • The number of days or weeks you worked remotely in each location

  • Your W-2 forms, as provided by your employer (or 1099s if you worked as an independent contractor)

  • Documentation for any expenses that may be tax deductible

Moving Forward

If you plan to continue working remotely, it’s crucial to keep the tax implications in mind when you decide where you’ll work. Keep your address updated with your company and notify the department that processes payroll if you’ll be working from a different state for any length of time. This will do a lot to help avoid unnecessary complications when it’s time to file your income taxes for 2021 and beyond.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.