CPAs may find themselves spending a lot of time educating taxpayers about the state tax implications of working from home and other locations during the pandemic.
A new survey conducted for the AICPA by The Harris Poll found that 55% of respondents who worked remotely this year aren’t aware of the potential tax consequences of not changing their state tax withholding to reflect where they worked remotely.
Nearly half (47%) don’t realize that each state has its own laws regarding remote work, and only 46% know that the number of days they spend working in a different state than where their workplace is could affect their tax liability.
“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,” said Eileen Sherr, CPA, CGMA, director–Tax Policy & Advocacy, the Association of International Certified Professional Accountants.
CPAs should consider reaching out to their clients now to alert them of potential issues, Sherr said.
“You have until the end of the year to change your withholding or maybe pay an estimated payment to the state so that the state income tax liability won’t be a surprise in April,” she said.
America’s patchwork of state laws means taxpayers who have worked in more than one state this year could face widely varying liabilities and filing requirements. Different states have different periods of time — from as little as one day to periods of 30 or 60 days — before income tax requirements kick in. There are other variables, too, including earning thresholds.
The survey suggests many taxpayers could face unexpected state tax liabilities. Some 42% of respondents said they had worked remotely during the pandemic, and 30% of that group said they had worked in a state other than where their worksite was located or a state other than their primary residence — about 1 in 8 of the total respondents.
A significant number of those who worked remotely said they had worked in two or more states outside their employer’s state, though the sample size is too small to say precisely how widespread this might be in the general population.
Litigation could loom
Paul Miller, CPA, at Miller & Co. LLP in New York said he expects taxpayers to grow frustrated when they discover some states may tax them even if they didn’t physically work there.
New York, for example, has already issued guidance in FAQs saying that out-of-state telecommuters working for Empire State employers will still be considered as working in New York for state tax purposes unless the employer “has established a bona fide employer office at your telecommuting location.”
“Clients will take the position they are nonresidents of that state, or didn’t work in the state, and deal with a residency audit and potentially end up in tax court,” Miller said.
Miller suspects that in the end, the government would be likely to win any such lawsuit. He compared it to South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), the Supreme Court case that opened the door for states to collect income taxes on e-commerce purchases even if the seller has no physical presence in the state.
Miller is advising his clients to keep records of what states they’re working in and for how many days.
Battling the compliance burden
Some states have reciprocity agreements with other states, but not all, and some states have also enacted legislation or other rules to prevent employees from facing new state tax liabilities. For example, 15 states and the city of St. Louis allow employees who are temporarily telecommuting to pay tax in the state where the employer is located.
The AICPA has collected this and other information on pandemic-related state tax law relief in a single document.
Sherr noted the AICPA has also encouraged state associations to advocate for compliance burden relief with state lawmakers and has supported a federal law to address the issue. The Remote and Mobile Worker Relief Act of 2020, S. 3995, would provide uniform rules for nonresident state and local income tax withholding, Sherr said, providing a 30-day grace period during which a nonresident worker wouldn’t be subject to state or local income tax withholding. During the pandemic, that period would be extended to 90 days under the proposed law. There are other pandemic relief provisions as well.
“It would be a lot of relief, and we’re hopeful that this legislation will move forward,” she said.
Whether through legislation or litigation, Miller said the pandemic will force tax laws to modernize.
“This is the beginning of making old, archaic tax laws nimble,” he said.
The survey was conducted online Oct. 6–8 and drew responses from 2,053 U.S. adults, 1,199 of whom were employed. The results have been statistically weighted for age within gender, region, race/ethnicity, household income, and other factors. The sampling error is +/- 3%.
— Mark Tosczak is a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Chris Baysden, a JofA associate director, at [email protected].