A concert at Red Rocks Park and Amphitheater outside of Denver.
John P. Kelly | The unpublished image bank | Getty Images
With the turmoil of the pandemic in which Americans live and work, many are now faced with the dizzying maze of income tax problems.
However, workers in some industries, such as entertainment, have faced these issues for years.
Touring musicians, TV presenters, athletes, film crews and other entertainment professionals working in the United States struggled with tax problems long before Covid-19, financial experts say.
Artists and sports professionals are often caught in the net of various state and local income taxes, said Chris Cooper, certified financial planner at Chris Cooper & Company in San Diego.
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Typically, workers owe taxes in their home state, where they spend most of their time, own a home, register a car, vote, and more.
When working and paying levies elsewhere, some states have reciprocal agreements, which allow workers to avoid double taxation.
While New York and Los Angeles are still magnets for those working in entertainment, some professionals have moved to low-tax jurisdictions, said Jason Moll, CPA and partner at HarnarMoll LLP in Nashville, Tennessee.
For example, while there is a maximum 13.3% levy in California, states like Florida, Nevada, Tennessee, and Texas may be attractive because they are exempt from income tax.
“I’ve had quite a few clients who have done it, even clients who are actors,” Moll said. “They don’t tour all year round.”
However, if a Los Angeles transplant moves to Nashville but still spends a lot of time in California, she may have a hard time proving she is no longer a resident, Moll explained.
“Your credit card bills tell a pretty telling story of where you spend your time,” said Robert Seltzer, CPA at Seltzer Business Management in Los Angeles.
State tax matters
Touring artists or athletes working in multiple states throughout the year can have particularly complex tax issues. They must report their income to each state, pay taxes and file income tax returns for non-residents.
“If someone is on tour, then some states will get their hands on it,” Seltzer said.
Television and film is another industry with a large number of temporary workers who may have income tax problems.
“It really depends on your source of income,” Seltzer said.
For example, let’s say a California team moves to Georgia for a new production. These workers must withhold Georgian direct debits and file a non-resident declaration, he said. However, they will receive a credit for the taxes paid on their California return.
“As a California resident, it really doesn’t hurt them because Georgia’s tax rate is lower,” Seltzer said.
But if a Georgia-based team were to work in California, there could be a problem because they cannot claim full credit for the higher California taxes paid on their Georgia return, he said.
Tourist tax problem
In addition to state income tax issues, artists can also be affected by municipal taxes, Cooper explained.
There are local taxes in nearly 5,000 jurisdictions across the country, including many in states along the Rust Belt, such as cities in Ohio and Pennsylvania, according to the Tax Foundation.
“It doesn’t matter if it’s a self-employed person, an employee of W-2 or a company,” Cooper said. “These local tax authorities can sue them because they are entitled to it.”
Cities with local levies include Detroit, New York, Philadelphia, San Francisco, and St. Louis.
For example, Philadelphia’s payroll tax, one of the highest in the country, is currently 3.4481% for non-residents.
Here’s the problem: let’s say an artist is performing somewhere with municipal taxes. While many places offer credit to avoid double taxes at the state level, the same deduction typically doesn’t apply to municipal taxes, Cooper said.
How to Avoid State Tax Problems
“Your tax planning begins the day you set foot in another state,” he said.
Those who work in different locations throughout the year will need a proactive approach to avoid problems, Cooper added.
The American Institute of CPAs suggests keeping records of all remote work, including the number of days in each state and municipality.
When a client starts a new job, Cooper recommends checking the “unique” box on an employer’s tax form, even when married, to withhold more withdrawals from each paycheque.
Plus, if they worked in the same state last year, they can avoid penalties by checking their previous tax return. As long as they withhold or make tax payments estimated at 100% of last year’s net income tax, they will not incur penalties, Cooper said.
However, working in a new state can be trickier without filing taxes from the previous year. In those scenarios, someone can pull a blank tax return from their state’s website and try to estimate the levies based on the projected profits for the year, he said.
Of course, working with a tax professional can be the easiest way to calculate source deductions and avoid penalties, especially when someone works in multiple locations throughout the year, Cooper said.
While established artists may have business leaders to deal with these issues, new artists may not have the same privilege, he said.
“They have to create their own form of representation,” Cooper said. “The first person to start with is a tax professional.”
Americans working remotely
The pandemic has forced many Americans to work from home and some have temporarily set up remote offices elsewhere, exposing themselves to state tax problems.
At the end of 2020, about 30% of remote workers said they were doing their jobs in a different state than they were before the pandemic, according to a Harris poll for the AICPA.
However, over 70% of those polled were unaware that telecommuting in another state could affect their taxes. While many states have waived tax reporting for temporary remote workers in 2020, these repayments are lifted for 2021.