The COVID-19 pandemic has raised a number of perplexing tax issues, and it doesn’t seem like there’s an end in sight. A good example is the state and local wage reporting conundrum for businesses and for workers.
Working from home has a unique set of perqs, but it also has its pitfalls. Combine those pitfalls with how many people were effectively “stuck” in their second homes, often in remote locations from their tax homes (across state lines, in many cases), and the income tax reporting can get very tedious.
For employers with remote workers, it is entirely possible that the location(s) of those workers may have triggered a nexus in a state (or states) where those employers would not otherwise be considered to “have employees.” This means that these businesses will have to report wages and should possibly have withheld income taxes in those locations, have registered with the related authorities, and possibly have paid contributions to state unemployment insurance funds there.
For employees, the situation is not any easier. It’s possible that income tax returns will have to be filed in states where those taxpayers may have maintained a second home, but where they have never before generated any income.
The AICPA has provided the following guidance for taxpayers, which states, in essence:
- Compile a list of any states where you’ve worked remotely during 2020.
- If you didn’t track the specific number of days worked in other states, try to approximate the number of days as best you can.
- Depending upon the state, income taxes may also be levied by cities, counties, municipalities, school districts, or other jurisdictions. Make sure you also track this level of detail.
- Consult a qualified tax advisor. He or she should be able to help determine relevant questions to ask based upon where services were performed and for how long.
- Check your state tax withholding (for as many states as may be required) and make any necessary adjustments. If your withholding (in any one of them) is too low, you may owe (additional) state taxes, interest, and penalties when you file your 2020 return(s).
- Going forward, be sure keep an ongoing record of all jurisdictions where you work remotely.
Again, this is not something that do-it-yourself, off-the-shelf tax software can provide. Only a qualified professional has the skills to advise as to the best course of action in these matters. There is no one-size-fits-all solution to issues such as these, but rather, each situation (for employers and for employees) must be considered on its own.
Rosenthal & Rosenthal, LLC is a public accounting firm comprised of principals who are Enrolled Agents, recognized to practice before the Internal Revenue Service. We stand ready to assist in these troubling times. Feel free to contact us to discuss your concerns.