A concert at Red Rocks Park and Amphitheater outside of Denver.
John P. Kelly | The unpublished image database | Getty Images
With the pandemic Americans live and work in, many now face the dizzying maze of income tax issues.
However, workers in some industries, such as entertainment, have been dealing with these problems for years.
Tour musicians, TV presenters, athletes, film crews, and other entertainment professionals working in the United States grappled with tax issues long before Covid-19, financial experts say.
Entertainers and sports professionals are often trapped in the web 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 owning a home, registering a car, voting, and more.
When they work and pay taxes elsewhere, some states have reciprocal agreements that allow workers to avoid double taxation.
While New York and Los Angeles are still major draws for those working in the entertainment industry, some professionals have moved to countries with lower taxes, said Jason Moll, CPA and partner at HarnarMoll LLP in Nashville, Tennessee.
For example, while California has a top tax of 13.3%, states like Florida, Nevada, Tennessee, and Texas can be attractive because they are income tax-free.
“I’ve had some clients who have done that, even clients who are actors,” Moll said. “They don’t shoot all year round.”
However, when a Los Angeles transplant moves to Nashville but still spends a lot of time in California, it can be difficult to prove that it is no longer a resident, Moll explained.
“Your credit card statements tell a pretty insightful story about where you spend your time,” said Robert Seltzer, CPA at Seltzer Business Management in Los Angeles.
State tax issues
Touring artists or athletes who work in multiple states year round can have particularly complex tax issues. You must report income to each state, pay dues, and file tax returns for non-residents.
“When someone is on tour, certain states will shake hands,” said Seltzer.
Television and film are another sector with a number of temporary workers who may have income tax problems.
“It really depends on what your source of income is,” Seltzer said.
When someone is on tour, certain states will reach out their hand.
Robert Seltzer
CPA at Seltzer Business Management
For example, let’s say a California crew moves to Georgia for a new production. These workers must withhold Georgia dues and file a declaration for non-residents, he said. However, you will receive credit for taxes paid on your California return.
“As a California resident, it really doesn’t hurt you because the Georgia tax rate is lower,” Seltzer said.
But if a Georgia-based crew was working in California, there could be a problem because they couldn’t fully credit the higher California taxes paid on their return from Georgia, he said.
Trouble with the city tax
In addition to state income tax problems, entertainers could also be affected by city taxes, Cooper said.
There are local taxes in nearly 5,000 jurisdictions across the country, many in states along the Rust Belt, such as cities in Ohio and Pennsylvania, according to the Tax Foundation.
“It doesn’t matter if you’re self-employed, a W-2 employee, or a company,” said Cooper. “These local tax authorities can prosecute them because they have the authority.”
Cities with local donations are Detroit, New York, Philadelphia, San Francisco, and St. Louis.
For example, Philadelphia wage 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 city tax. While many places offer credit to avoid state-level double taxes, the same write-off typically doesn’t apply to city taxes, Cooper said.
This will help you avoid government tax problems
“Your tax planning begins the day you step foot in another state,” he said.
Those who work in different locations year-round need a proactive approach to avoiding problems, Cooper added.
The American Institute of CPAs suggests keeping records of all remote work, including the number of days spent in each state and community.
When a client starts a new job, Cooper recommends checking the “singles” box on an employer’s tax form, even if they are married, in order to withhold more dues from each paycheck.
Additionally, if they worked in the same state last year, they can skip penalties by reviewing their previous tax return. As long as they withhold or make estimated tax payments equal to 100% of last year’s net income tax, they will not face any penalties, Cooper said.
Your tax planning begins the day you set foot in another state.
Chris Cooper
Certified Financial Planner with Chris Cooper & Company
However, working in a new state without a previous year’s tax return can be more difficult. In those scenarios, someone can pull up a blank tax return from their state’s website and try to estimate the dues based on projected earnings for the year, he said.
Of course, working with a tax professional can be the easiest way to calculate withholding and avoid penalties, especially if someone works in multiple locations year-round, Cooper said.
While established entertainers may have business leaders who take care of these issues, newer artists may not have the same privilege, he said.
“You have to create your own form of representation,” said Cooper. “The first person to start with is a tax professional.”
Americans who work remotely
The pandemic forced many Americans to work from home, and some have temporarily set up remote offices elsewhere to expose themselves to government tax problems.
At the end of 2020, according to a Harris survey for AICPA, around 30% of teleworkers said they worked in a different state than before the pandemic.
However, more than 70% of those surveyed did not know that teleworking to another state could affect their taxes. While many states waived tax returns for temporary remote workers in 2020, those grace periods will be lifted in 2021.
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