Working from home in the Kansas City area? You may qualify for a tax refund this year
The scenario is a common one: you live in Overland Park or Raytown, hop on the interstate and regularly commute to downtown Kansas City for work.
As of late, the pandemic may have forced you to work at home. While those actions were meant to help slow the spread of the coronavirus, they undoubtedly led to employees performing their work in other cities and states.
And that means many must now consider another big change: their taxes.
It’s especially true for those who work in Kansas City, which levies a 1% earnings tax on all residents and all nonresidents who work in the city.
Before the pandemic, a worker in downtown Kansas City who commuted from Lee’s Summit or Lenexa would pay the 1 percent tax on their earnings. But now, if that work is largely being done outside Kansas City limits, those workers could claim a refund on the tax they’ve paid.
“For people who are working at home now that could be significant,” said Nathan Rigney, lead tax research analyst at H&R Block’s Tax Institute. “There will be a little added complexity, but an awful lot of people are going to get some money back this year.”
This is an end-of-the-year tax consideration, but workers should keep count of the days they work from home now.
The refunds will depend upon how long workers stay home, but an $80,000 per year earner who works at home for half of 2020 could receive a $400 refund at the end of the year.
Of course, any savings to workers will come at a cost: with sales tax revenues already declining, Kansas City is poised to suffer a separate hit on its earnings tax stream. The earnings tax loss will hit doubly hard: Kansas City will see declines from the thousands of workers who have been laid off and furloughed. But city leaders also expect to owe many taxpayers refunds at the beginning of 2021 when they start filing income taxes.
Nonresidents of Kansas City already can claim refunds by filing an end-of-the-year form with the city. That’s used in cases where a worker splits work time between Kansas City and another city — like a plumber who does work in Kansas City some days, but also is employed in Gladstone and Olathe. In 2018, fewer than 6,000 workers applied for refunds, city officials said.
Most workers never file a city tax return the way they do for state and federal taxes. But by tracking how many days were worked out of the city, Rigney said workers can expect to get some of their earnings tax back as most employers continue withholding the tax even with large swaths of their workforces spread across the metro.
“It’s a little bit complicated in the sense that there’s some math to be done, some division,” he said. “You have to be able to allocate those days of work and you have to fill out that tax form.”
Similarly, workers who live in one state and usually commute across the state line may have to reassess their tax situation this year if they’ve begun working from home.
“There’s going to be a lot of complexity this year,” he said.
Rigney, who works at H&R Block’s headquarters in downtown Kansas City, has been working from his home in Kansas in recent weeks. He normally has Kansas City and Missouri taxes withheld from his paycheck. In Kansas, he receives a credit each year for those taxes paid.
“This year, if I do this correctly and I claim that refund I’m entitled to for my Kansas City earnings tax then I won’t get that credit,” Rigney said. “Then I’ll probably turn around and pay that money to Kansas.”
Some tax experts have wondered how permissive the city would be in allowing waves of workers to receive refunds. But city leaders said there’s little they can do.
“It is what it is in terms of the economic impact for the city,” said city spokesman Chris Hernandez. “I think it’s just one of many, many things that we have to consider because of the pandemic recession, so we know it’s going to have an impact.”
City councilwoman Katheryn Shields, chair of the finance, governance and public safety committee, said the city didn’t have any plans to curb its longstanding refund process.
“The money is collected as usual, but then it’s upon the taxpayer to then reach out to the city and ask for a refund,” she said.
Kansas City Mayor Quinton Lucas said potential refunds of earning taxes would hit the budget but said the city is buffered by diverse revenue streams.
“I don’t know if it’s such a high number that it will lead to a massive collapse of the earnings tax,” he said.
In the last fiscal year, the earnings tax was estimated to bring in about $270 million — more than 45% of the city’s approximately $580 million budgeted general fund. The city has not collected all those taxes for the fiscal year that ended in April as it extended its tax deadline amid the pandemic.
In 2014, the last time the city examined the issue, about half the earnings tax came from nonresidents. City residents, regardless of where they work, must pay the tax.
Kansas City is home to about half a million individuals. But the wider metro area includes more than 2 million residents.
“A lot more people commute into Kansas City than commute out,” said Charles Jensen, a partner and tax attorney at the Stinson law firm.
He said only a handful of states have offered guidance on how they will handle taxes for remote workers — sure to be an issue in the bi-state Kansas City area. Aside from complicating individual tax returns, companies may face additional uncertainty: if a Missouri company, for instance, starts reporting a large share of its employee base works from Kansas, it may face corporate income tax liability in Kansas.
“The employer has a stake in the outcome,” he said. “They also don’t want to start withholding Kansas income tax just because I’m working from home whereas up until March I was always working from my office in Kansas City, Missouri.”
The issue of where a worker is based has been a question for bean counters and tax experts for years. HR professionals must manage campuses in multiple states and classify workers like salesmen who travel extensively for their jobs.
But Jensen said the rise of remote work during the pandemic will make employers and governments confront those issues at an entirely new scale.
“It’s kind of a hornet’s nest,” he said.
The Star’s Allison Kite contributed to this report.
