How Do Taxes Work if You Work Remotely: A Guide to Navigating Your Taxes
Personal TaxesStatistics unequivocally show that remote work is here to stay. According to Upwork, one of the world’s largest freelancing platforms, the number of remote workers in the United States will reach 36.2 million by 2025.
A growing number of independent contractors and full-time remote workers try to keep up with how taxes work if you work remotely, as tax laws vary by state.
The vital thing to know is that remote workers can easily avoid double taxation if they live in one state and work in the other. In this guide, we’ll explain how taxes work if you work remotely and show you how to increase your tax refund.
Table of Contents
Federal Taxes for Remote Workers
All companies must withhold federal taxes from the salaries they pay to their employees.
The same rules apply to full-time employees who live in the same state where they work and go to the office at least a few times per week and remote workers that do most of their work from home.
The IRS considers you a full-time employee if your employer issues you Form W-2 whether you work predominantly from home or an office. Consequently, your employer has to withhold these taxes from your pay:
- Federal income tax.
- Medicare.
- Federal Unemployment Tax (FUTA).
- Social Security Taxes.
Independent contractors that conduct their business in the same state where they live report federal taxes independently with Form 1099-NEC. The same goes for state and local taxes, so if you’re a freelancer, you’re responsible for filing state taxes.
State Taxes for Out-of-State Workers
The tax rules for remote workers that work and live in the same state are simple. They must pay federal and state (if applicable) taxes to the state they live in.
The only difficulty companies that hire remote workers might face is that they may have to pay different local taxes for their remote employees depending on their place of residence.
The tax situation is far more complex for out-of-state workers who commute to work across state lines or work in one state and live in another.
Remote workers who don’t live in the state where they work don’t have to file taxes in both states if they work from home.
Hence, if you live in the State of New Jersey, but the company you’re working for is based in California, you’ll only have to pay taxes to the state where you live. There are several exceptions to this rule.
Remote Workers Commuting Across State Lines
Traveling for work across state lines can put you in a unique tax situation because you might face double taxation. This means you’ll have to pay taxes in the states where you live and where you work.
Some states have reciprocal agreements that enable remote workers to pay taxes in just one state and avoid double taxation.
For instance, if you live in West Virginia, Pennsylvania, Washington DC, or Virginia and work in Maryland, you’ll only have to pay state taxes in your home state. You can file a nonresident state tax return to avoid being taxed on the same income twice.
Home-based Remote Workers
Employers that hire out-of-state employees who predominantly work from home must report state taxes to the states where their remote employees live and not the state where their companies are registered.
Consequently, your employer is responsible for reporting your income and withholding unemployment or social security tax to the state where you live. This rule only applies if you live in a state that levies a state income tax on its residents.
Remote workers from the following states don’t have to pay state income tax:
- Texas.
- Washington.
- Alaska.
- Tennessee.
- Wyoming.
- South Dakota.
- Florida.
- New Hampshire.
Independent contractors that move from one state to another while working remotely from the same employer must establish a domicile or obtain a permanent residence to avoid double taxation.
Sometimes, the state to which a remote worker relocated might conduct an audit to establish that a freelancer is no longer a resident of their previous home state.
You’ll have to rent or buy a property, update your mailing address or obtain a new driving license to prove you’re no longer eligible to pay income taxes in another state.
It’s also worth noting that you can continue paying taxes in your home state if you temporarily work from another state. Remember that all states limit how long nonresidents can work before becoming eligible for state income taxation.
What is the ‘Convenience of Employer’ Test?
Employers that don’t specifically require employees to work remotely may have to pass the ‘Convenience of Employer’ test if their workers are based in one of the states below:
- New York.
- Pennsylvania.
- Arkansas.
- Nebraska.
- Delaware.
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.
Consequently, remote workers employed by companies based in ‘convenience states’ might face double taxation.
Taxable Employee Benefits and Costs of Remote Work
Companies that offer group term life insurance, bonuses, vehicles, employee stipends, and other taxable employee benefits to remote workers must report these benefits when filing state taxes.
However, some states don’t require organizations to report taxable employee benefits they offer to their remote workers, which is why you must check state tax laws for each remote worker you hire.
Offering an employee stipend is one of the easiest ways employers can cover the cost of remote work while remaining compliant with state tax laws.
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.
Working With Remote Workers Outside of the United States
Navigating the waters of international tax laws is tricky for companies and remote workers. US citizens who live abroad and work for a company based in the United States only have to pay taxes in their country of residence.
However, you may owe taxes in the US if you earn more than $100,000 per year, so you must check your tax responsibilities before you file a tax return to avoid generating tax debt.
US companies that want to employ an international remote workforce cannot do so directly unless they register a legal entity in a different country or utilize the services of an Employer of Record organization.
Both solutions are expensive, which is why most businesses treat non-US nationals they hire as independent contractors. International remote workers must meet the following criteria to qualify as independent contractors:
- Have no restrictions regarding when they work.
- Remote workers must be able to choose how they receive payments.
- Remote workers should have control over the rates they charge.
- Work with two or more companies.
US businesses that hire international remote workers who don’t meet these criteria can potentially face penalties at home and abroad.
It’s also worth adding that independent contractors must pay taxes by themselves because companies usually don’t withhold taxes for them.
How to Limit Your Tax Liability as a Remote Worker
Geographic location is one of the critical factors that determine a remote worker’s tax liability. Hence, being familiar with state and local tax laws can help you spend less on taxes.
Here are a few things you can do to keep your tax obligations at a minimum while working remotely.
- Learn more about state laws before relocating to a new state – Find out as much as possible about the local and state tax laws before deciding to move to a different state. Doing so will help you avoid being taxed twice for the same income.
- Define your status – Don’t assume all types of remote work are the same. Ask your employer if you’re classified as a full-time remote worker or an independent contractor so that you can know which taxes you must pay.
- Avoid working as an independent contractor from outside the US –US citizens living abroad must ensure they qualify as independent contractors. Insisting on being hired through an EOR is usually the safest option for remote workers who don’t meet the independent contractor criteria.
Frequently Asked Questions
Remote workers that receive Form W-2 from their employers don’t have self-employed status.
Full-time remote workers can only make standard or itemized tax deductions available to all other taxpayers. Independent contractors can claim business expense deductions on tax returns.
US citizens who live abroad and work for a US company must file a tax return in the United States and pay taxes in their country of residence unless they’re earning over $100,000 per year.
Remote workers must pay local and state taxes even if their employer is in a different state.
Speak with a CPA
How taxes work when you work remotely depends on where you live. In most cases, you’ll only have to report taxes to the state you’re currently living in and not the state where the company you’re working for is based.
However, different rules apply if you live abroad or commute to work over state lines.Call 866-8000-TAX or go to choicetaxrelief.com to schedule a free consultation with a CPA who can assist you with filing taxes as a remote worker.
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Author:
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.
