Your Newly Remote Workers May Have Tax Questions. Here’s How to Help.
When the COVID-19 pandemic hit, two-thirds of employers allowed a majority of their teams to begin telecommuting.1 Today, many workers still have not returned to the office—and many of them aren’t logging in from home either.
Your employees may have decided to pack up their laptops and trade small city apartments for larger accommodations out of state, perhaps with parents in the suburbs or at a second home near the beach. But workers who’ve moved out of state may face some surprises at tax time—including owing in both places.
Giving them a heads up about potential tax issues could alleviate stress or mistakes when it comes to filing—and remind your workers that you’re thinking of their financial wellness.
While your advice can’t replace that of an accountant or tax advisor, you can broadly discuss common potential pitfalls. Here are the areas to cover:
Each state has its own—often complicated—set of tax rules, which may apply to temporary workers in addition to permanent ones. There are two dozen states where punching the clock for just one day could result in a tax bill.2 Workers who wind up owing taxes in two (or more) states will have to file in each one.
States with particularly robust rules, such as New York, may not only tax people who temporarily come for employment, but also those who live and work somewhere else all year round if your company is headquartered in the Empire State. Keep in mind, not all states impose such rules, and more than a dozen states have agreed to waive their tax laws for remote workers who’ve relocated because of the pandemic.3
Moreover, some neighboring states, like Maryland and Virginia or New Jersey and Pennsylvania, already had reciprocity agreements allowing commuting workers to solely pay taxes where they reside, not where they do business. Some states may also offer credits to residents who must pay income tax in another state where they’ve temporarily relocated.4
One way to prevent getting hit by a surprise state tax bill is for employees to keep their W-2 up to date. Take this opportunity to remind them how to access and update the form and explain that doing so will allow you to withhold the correct amount based on where they're working.
Workers who owe in multiple states will have to file state tax in each of those states, though many states allow for “partial year” returns. In that case, workers will need to show how much time they spent working in each state. Having an accurate accounting of the amount of time spent in each state can make that process easier.
It can also prevent audit issues later, since the IRS may consider it perjury if an employee misrepresents or withholds information about the time they worked out of state. Auditors may use mobile phone and credit card records to double check that a workers’ whereabouts match their return.5
Given the complicated rules, many workers would benefit this year from getting professional help with their taxes. A knowledgeable accountant or tax advisor will understand the laws in the states where your employees have lived and worked during the tax year and better help them understand the tax obligations specific to their situation.
While they’re focused on finances, you might also remind your workers of the value of other professional financial resources—including those available through a financial wellness program. Learn more about Morgan Stanley at Work, helping companies and individuals wherever they are on their wealth creation journey.