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Remote Work Setups Cause Higher Tax Fees, Experts Show

Being forced to work from home does not save one from paying hefty taxes to come April 15. For some, they might even be subjected to higher income taxes - depending on where they have decided to work remotely.

Work From Home Arrangements Can Cause Higher Taxes?

The majority had no choice but to transform their living room or bedroom into an office when the pandemic hit in 2020. However, some have decided, for various reasons, to take their work to another state - probably to keep their parents or relatives at a summer home, among other reasons.

This makes tax computations quite complicated because tax rates differ according to the state. Not everyone knows that, but ignorance does not change the laws.

"Working remotely in another state may - and often does - subject the individual to tax in that state," explained James O'Rilley, CPA and tax director for Doeren Mayhew in Troy. He added that for some people, this means their overall tax bill can even be higher.

For instance, if a higher tax rate is paid to the state where a Michigan resident is working remotely, for example, then he or she is likely to get a tax credit in Michigan. Still, that credit is only limited to Michigan's state income tax rate of 4.25%, the expert explained further.

Based on a survey conducted by the American Institute of the CPAs, 70% of the participants did not know that working remotely in other states could affect the total amount of state taxes they need to pay.

Also, over 50% claimed they did not know that the number of days they have worked outside where their physical workplaces are located could also alter their tax obligations.

"Your tax situation is probably a lot more complicated in 2020 than in the past if you have been in multiple states," said Eileen Sherr, director of tax policy and advocacy at the American Institute of CPAs in Washington, D.C.

The same organization had conducted a poll back in October 2020. The results revealed that around 30% of those who worked remotely during the height of the pandemic said they had worked in another state that was outside of where their listed office or business is located.

Ignorance Not an Excuse

One strange finding is that some people even worked in three or more states at the time. The issue is that they did not even track the number of days they have worked out of their own states.

Naturally, around 60% did not change their tax withholding. They are not safe because the accounting experts claimed that they could still owe taxes if they did not have taxes withheld outside their home state and worked elsewhere.

It's unclear how states keep track of where people work, but "it's a gotcha waiting to happen," said Maureen Riehl, partner with MultiState Associates and executive director for the Mobile Workforce Coalition.

The coalition, which has garnered the support of the Michigan Chamber of Commerce, Masco, and 400 more institutions, urged states across the country to put a uniform 30-day threshold for personal income tax withholding and return filing requirements for out-of-state residents.

They believe that if there's a 30-day window, the employer and employee can adjust and prepare for the state tax obligations and requirements and pay the right amount.