Working Remotely From Another State? How Income Taxes Are Affected
Are you working for your employer remotely? More and more Americans are being offered or even being required to work from their home rather than come into an office every day. While this is a boon for many employees, it can create some additional complexity when it comes to filing your income taxes. This is particularly true if your living and working situation happens to cross state lines. Here are some answers to common questions.
Why Does the State Matter?
Most U.S. states impose income taxes in addition to federal taxes. But most Americans live and work in one state, so they rarely give thought to this additional tax issue. However, each state determines which individuals must file and pay taxes within its borders, and those rules can vary.
In general, a state expects its residents to file income tax forms — but it may also require non-residents who earned income within the state to file income taxes. Therefore, a remote worker who lives in Colorado but who used to work in an office in California may have to deal with taxes in both states.
In Which State Do You File Taxes?
Generally, each employee's Form W-2 is used to determine in which state they file taxes. The state portion of this IRS form lists how much of the taxpayer's income was earned in each state and how many taxes were withheld.
If your home (resident) state is the only one listed, you generally file only in that state. However, if your income was reported as being earned in your employer's state (or any temporary work location), you likely need to file non-resident tax forms in that state as well.
Will You Be Taxed Double?
Certainly, filing income taxes in two or more states is enough inconvenience, but does it mean you will pay double the taxes? Not necessarily.
In general, you complete both states' income tax forms for income earned in that state. Then, the resident state usually allows the taxpayer to deduct taxes paid to the non-resident state from its total. So, if the Colorado resident above calculates $1,000 as tax due to California, the state of Colorado would allow them to deduct that $1,000 from Colorado taxes due.
Where Should You Start?
If you have been or will be working remotely from another state, start by learning more about how your income tax obligations will change. Meet with a tax service in one or both of the states involved. They will help you learn about tax requirements in both states and how to avoid accidental double taxation. Make an appointment today to get started.