Facing the pandemic, an estimated 40 million U.S. employees were suddenly granted an opportunity to work from home. Ever since, employers have been trying to figure out ways to get them back into the office! Naturally, conflict ensues. Strongly worded emails are dispatched, birds are flipped, chairs are tossed, tissues expended — everyone resigns.
Fast-forward to the present, to what is now being formally called The Great Resignation. During the second quarter of this year, 11.5 million employees have split from their bosses, for myriad reasons. And let’s be honest — many of them will never go back… ever.
Millions of workers have now suddenly taken up employment with out-of-state employers. For obvious reasons, employees would rather not leave their house, and employers are seeking to take advantage of the work from home revolution by hiring from an expanded pool of talent — nationally.
This revolution in the labor market is undoubtedly causing an evolution of headaches for your tax accountant. In 2020 our firm witnessed an unusual uptick in the number of multistate tax returns that were self-prepared by taxpayers. In most cases, taxpayers shouldn’t have needed multistate tax returns — but mistakes on the part of the employer were creating abnormal filing problems for employees.
If you are an employee who has taken up employment with an out-of-state company, you should immediately contact your HR department to ensure that you are withholding income taxes to the correct state. If your employer has only just begun hiring from a national talent pool, there’s a pretty decent chance that their payroll team will have no clue as to how to withhold taxes to your home state.
Many HR departments have made the dangerous mistake of presuming that the taxes they should withhold always default to the employer’s state of origin. Let’s be absolutely clear — this is 100% incorrect.
Employers are obligated to withhold income taxes at the federal and most state levels as per the liabilities that the employee will incur based on where they live and work – not based on where their employer is located.
For example, if an employee lives in Colorado and works remotely for a company in Kansas, that Kansas employer must withhold Colorado taxes because Colorado & Kansas law both agree that the employee will owe Colorado – not Kansas. This means that this employer must apply for a Colorado wage withholding license, state unemployment, and probably needs to update their workers compensation insurance too!
We have also seen employers who boast that this is not an issue because the taxpayer receives a credit for taxes paid to other states. From an employer’s liability perspective, making such presumptions is dangerous. These employers are basically giving tax advice they are not qualified to give — not to mention, it is also bad advice!
When an employer withholds taxes for the wrong state, they are now requiring the employee to file a multistate return — and the probability of self-prepared errors grows exponentially. Every state has a slightly different formula for how to compute taxable income, how to recognize taxes paid to other states, as well as how to determine pro-rata taxable income. This complicates calculations, and subsequently costs the employee time and money.
Many states also have tax legislation that requires the employee to prove that they have state-sourced income in order to qualify. When an employer withholds for the wrong state, on form W-2 this looks like all those wages were earned in the incorrect state. This could complicate an employee’s life if they are trying to qualify for state level benefits, credits, or tax deductions.
Lastly, employers could be digging themselves an early grave if they routinely and frequently disregard the proper procedures for withholding taxes as an employer. If your boss “defaults to the home state” for withholding and paying taxes simply because they do not want to go through the headache of applying for multistate licenses, they could be putting themselves in jeopardy in the event they get audited by the state in which they should have been withholding or paying unemployment and workers compensation insurance.
All it takes is one disgruntled employee complaint and letters from the unemployment auditor begin to arrive. “I didn’t know,” is not sufficient to prevent the state from levying back-taxes, underpayment penalties, and interest charges — not to mention criminal investigations.
If you’ve just started a new job working from home, you should contact your tax advisor to ensure that you’re withholding taxes correctly. Baum CPA is here to help — Give us a call today at 719-493-9499.
If you’re an employer and you’ve just begun hiring out of state, you should also contact your tax advisor to ensure that you’re withholding for the correct states and have applied for and maintain the proper licenses for each state you recruit from. Baum CPA can help — we provide payroll services in all 50 states. Correctly. Schedule a consultation with us today by clicking here.
“By failing to prepare, you are preparing to fail.” —Benjamin Franklin
This blog and its authors provide this content strictly for informational purposes. No content herein should be misconstrued as financial advice. Everyone’s specific circumstances vary — Always consult with a qualified, licensed financial advisor, legal counsel, and tax professional before venturing into any investment or business activities.