Need help with filing on the State level - Remote Work in AR for a employer based in IL

[moosejaw50]

I lived in AR for the entirety of 2021 working remotely. My employer is based in IL, and IL collected the state income tax for 2021. Would I be filing a resident state return for AR, and a non-resident return for IL, or a different combination?

For reference, in the year 2020, I lived in IL and worked on-site for the same employer for a few months. Then, I moved to AR and continued working remotely. For 2020 tax year, I filed two state tax returns, one resident version for AR, and a non-resident for IL. 

What should I be doing for 2021?

[HelenC12]

For 2021 you are a resident of AR and need to pay AR income tax. You need to inform your employer to stop withholding IL income tax. You also need to file an IL nonresident income tax return to get back all the IL state taxes you paid in error. 

• Note: The income sourcing is determined by the location where the employee services are actually performed, not the location of the employer.

Please see How do I file a nonresident state return?

[moosejaw50]

Thank you...another question regarding the forms. 

I will file a non-resident form for IL as you've stated.

For AR, resident form, there was a section in the TT software regarding "Credit for Taxes Paid to Other States"

- Here I keyed in the taxes paid to IL in error to receive credit on the AR taxes.

Is this accurate or should I receive credit for state taxes paid on a different form?

[DianeW777]

Remote workers whose companies are based in in seven states will incur a tax liability n their state of residence as well as in the state in which their company is located due to convenience rules. These include Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania. 

Illinois (IL) is not one of the states who impose this tax for remote employees.  This means that you should receive a full refund from IL.  Because they do not tax your earnings as a nonresident of IL, you cannot take a credit for taxes paid to another state on the Arkansas (AR) return.

1. Remove the credit for taxed paid to another state on your resident AR return.
2. Review your IL return to be sure you are getting a full refund
3. Contact your employer to request they stop IL withholding immediately as indicated by our awesome Tax Expert @HelenC12.
   • There is still time to stop this for 2022 so that this situation will not occur again next year.

IL Filing Requirements for Nonresidents:

a nonresident, you must file Form IL-1040 and Schedule NR if:

• you earned enough taxable income from Illinois sources to have a tax liability ( i.e., your Illinois base income from Schedule NR, Step 5, Line 46, is greater than your Illinois exemption allowance on Schedule NR, Step 5, Line 50), or
• you want a refund of any Illinois Income Tax withheld in error. You must attach a letter of explanation from your employer. 
  • Be sure to get a copy of a letter from your employer just in case you need it later.