If one state does not have an income tax, the employee will generally only pay income taxes to one state. In this scenario, the tax consequences depend on whether it is the employee’s state or the employer’s state that has the income tax. For example, if someone resides in Texas but works for an employer located in Louisiana and they work 100% remotely, they will owe no state income taxes. Texas has no income tax, and the employee never earned income in Louisiana.
No, working remotely does not, on its own, make you self-employed or an independent contractor. Each jurisdiction has its reporting requirements, and these can vary considerably. If you’re looking for a tax-free health benefit option, a health reimbursement arrangement (HRA) is a great choice.
How to Do Taxes When Working Remotely Out of State
Self-employed individuals, freelancers, and independent contractors may be eligible for the home office deduction—as long as they meet IRS requirements. Additionally, self-employed individuals can deduct up to $1.22M in qualified business equipment under the Section 179 deduction for the 2024 tax year (the taxes due in 2025). The IRS requires proper documentation, and good recordkeeping helps you get the deductions you’re entitled to. Federal vs. state taxation are usually complex, especially when you’re working across multiple jurisdictions.
How are employees taxed when working remotely?
“It’s become a lot more complicated because the geography of locations has expanded,” says Zhanna Ziering, a top-rated tax attorney in New York City for Moore Tax Law Group. This lets you plan accordingly so you are not surprised when it is time to file your taxes. How working from home impacts your tax return depends on whether you qualify as a W-2 employee or work as a self-employed small business owner or contractor.
You may want to consider working with an accountant as well who specializes in remote workers and knows the nuances of your unique tax situation. This article breaks down the key things you need to know about how remote work impacts your taxes, from figuring out your residency status to understanding multi-state tax obligations. It explores examples and common scenarios to shed light on how to approach paying taxes when your home and work locations do not match. With some insight into the rules and planning, you can make smart decisions to minimize your tax burden as a remote worker.
Stay in the loop
The decision on what type of worker relationship to choose shouldn’t be based on the convenience of the arrangement alone. Yes, it’s critical to ensure a smooth process, but it’s also important not to end up on the wrong side of the law. Plane’s payroll and HR platform enables you to hire and pay contractors and employees worldwide. Following these tips and strategies can help ensure you meet tax obligations as a digital nomad. While taxes may seem daunting, approaching them in an orderly way with the right tools at your disposal can make the process smoother.
Remote Work Taxes: Everything You Need to Know
Remote work has changed the way we work, but what about how we file our taxes? You’re not alone if you’re wondering whether your home office expenses are tax-deductible. Remote employees today may face a more complex tax situation than they’re traditionally accustomed to. Individual situations how does remote work get taxed vary greatly depending on whether they’re working across state lines, from a different country, or simply from home.
- Spending significant time abroad may qualify you for the foreign earned income exclusion.
- Remote workers must understand these distinctions to avoid double taxation and ensure compliance.
- Proper documentation provides clarity in case of audits or disputes over tax obligations.
- Speaking with a tax attorney can help you determine what deductions you qualify for when filing your taxes.
- A sole proprietor’s business income and losses are reported on their personal tax return.
- Reciprocal agreements are beneficial for remote employees who work in neighboring states, as they prevent the need to file non-resident tax returns and avoid double taxation on income.
Here’s a quick guide to some of the laws around income taxes for hybrid and remote workers. Remote workers should verify their tax residency status in each state or country where they work. This is especially important for those who split time across states or work internationally. Knowing your residency status can help you anticipate tax filing requirements and avoid unexpected liabilities. However, if your employer mandates remote work due to business necessity, you might only owe taxes to Pennsylvania, based on state-specific guidelines. Because Pennsylvania and Delaware do not have a reciprocal tax agreement, it’s important for you to understand each state’s tax policies to avoid double taxation.
Managing payroll and tax withholdings for remote employees can be tricky for employees and employers. The best practices below can help both remote workers and organizations handle common payroll, withholding, and compliance challenges. Like the federal government, many US states levy an income tax to fund important social programs and projects. For employees living and working in the same state, calculating correct withholdings involves a single set of rules and regulations. However, once remote workers enter the mix, payroll processes and compliance workflows need to account for multiple requirements.
Compliance with Local Laws
- Stating whether remote work is mandatory or optional can help prevent disputes over tax obligations.
- For remote workers, this typically involves filing returns in the state where the employer is based, in addition to their home state.
- According to the so-called convenience rule, employers must report taxes to the state where their organization is based if its employees work remotely out of convenience.
Under the bona fide residence test, an employee must intend to be a bona fide resident of the foreign country for an uninterrupted period that includes an entire taxable year. An employee’s intention, purpose/nature of the trip, and length of stay are important factors required to satisfy the test, just merely living in the country will not qualify. Moreover, employees can leave the foreign country for brief trips (e.g., vacation) and still qualify, but they must always intend to return. When choosing a type of worker to hire remotely, check the federal, state, and local laws. For example, if you have a remote worker based in another state, it’s your responsibility to ensure payroll taxes go to the right state — more on that further in the article. Take advantage of tax software tailored to digital nomads and the self-employed.
It is a good idea for them to keep careful records of income and expenses to calculate tax liability. As a last resort, take extra steps to establish residency in a single country. Try limiting the time you spend in other places or cutting ties that can indicate closer connections elsewhere. Some digital nomads have residency in tax-friendly countries to legally lower their tax burden. Making an informed decision with a clear insight into the rules is the key. Still, you’ll need a company policy if you want to reimburse your remote workers for their internet subscription, home office setup, or mobile phone bill expenses.
Ma agrees that hybrid is here to stay — he believes that big companies can afford to lose employees and candidates by scaling back on remote options, but smaller employers won’t be able to follow suit. The easiest way of dealing with the taxation headache, in this case, is using the services of an accountant or a payroll company. Most payroll companies take care of all issues related to paying salaries and dealing with taxes.
The dilemma with all of these different income tax systems is that it puts some remote workers at risk of being double-taxed for the same income earned. They may have to pay income tax in the state where they live and in a different state where they earned the income. Employers must also comply with local employment laws in the states where remote employees work. This includes understanding payroll tax requirements, workers’ compensation obligations, and paid leave laws, which can differ widely between states. Failing to meet these local requirements may result in penalties or legal repercussions, so comprehensive compliance is crucial.