3 Tax Tips for Working Remotely Out-of-State

August 4, 2020

The recent pandemic forced many companies to rethink the way they do business.  Over the last three months, employees have had the flexibility to work from anywhere they want, which may include working in a different state from where they reside.  Employees that escaped their home state to work from their lake house or an out-of-state family members’ house, may face unexpected tax consequences.

Generally, when any work is performed in a state (including working remotely), taxes are owed to that state.  For example, if an Illinois resident fled to their lake house in Indiana to work remotely, they will owe both Illinois and Indiana state tax for the 2020 tax year.  Individuals who have been working remotely in another state should take the following steps to ensure there are no tax surprises at the end of the year:

1. Inform Your Employer

Your employer may need to register in the state and pay additional taxes.  They can also withhold the correct state taxes from your paycheck.

2. Reach Out to Your CPA

Your CPA can help you determine whether you need to withhold payroll taxes in multiple states or just in your home state.  Income tax reciprocity agreements exist between certain bordering states.  For example, Illinois has an agreement with Wisconsin, Iowa, Michigan, and Kentucky.  If you live in Illinois and are working remotely in any of these states, you only need to pay Illinois income tax.

3. Track Days You Worked in Each State

This will help ensure that information is correctly reported on your resident and non-resident state tax returns.  Failing to properly account for time spent working in another state can cause penalties and fines if audited by the state.

The above information should help you take the steps necessary to ensure there are no surprises for the 2020 tax year.