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:
Provide Tax Education by State and Circumstance
Each state has its own—often complicated—set of tax rules, which may apply to temporary workers in addition to permanent ones. Just 14 days of work in some states may trigger state and local tax reporting obligations;2 in others, a non-resident employee could owe taxes after just one day of work.3 Although reciprocity agreements may prevent workers paying tax in two (or more) states, they may still need to file income tax returns in each jurisdiction.
States with particularly onerous 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 the employer is headquartered in the Empire State and the employee was working remotely.4 And while some states waived their tax laws for remote workers who relocated during the pandemic, most have now returned to “business as usual”.5
Beyond these rules, some states that share borders, such as Maryland and Virginia or New Jersey and Pennsylvania, have reciprocity agreements that allow commuting workers to solely pay taxes where they reside, not where they do business.6, 7 Some states may also offer credits to residents who must pay income tax in another state where they’ve temporarily relocated.8
Aim to Track Residency
One way to help prevent tax bill surprises is for employees to keep their W-2 up to date. Information on how to access the forms and update them for residency could be a welcome reminder. You also need this information to withhold the correct amount of taxes based on where they're working.
Encourage Employees to Keep Detailed Records
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, while also potentially preventing audit issues at a later date.
Professional Support Can Help
Given the complicated rules, many workers could benefit 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.
This focus on finances may also present you with an ideal opportunity to discuss other workplace financial benefits—including those available through a financial wellness program. Learn more about Morgan Stanley at Work can help companies support their employees’ financial well-being.