The answers, unsatisfyingly, depend on a number of factors, including which states and how long you were there, according to tax experts we spoke with. Ahead of tax season, here’s what to look out for when filing your taxes on remote work. SHRM Members enjoy unlimited how does remote work get taxed access to articles and exclusive member resources.
Best practices when working remotely from another state
There are also state income taxes and state unemployment tax assessment (SUTA) taxes that can differ by remote work location. For example, some states, like Washington, don’t have a state income tax for wages. But Washington has unique employment taxes and mandatory benefits such as paid family and medical leave, long-term care insurance, and paid sick leave. You should check with each state you have employees in to see what taxes you’re responsible for. Your employer should initiate a tax compliance review when it is made aware of a remote employee’s new location.
- While it is the employer’s responsibility to apply tax law correctly, any missteps it makes will ultimately impact you financially.
- Consequently, remote workers employed by companies based in ‘convenience states’ might face double taxation.
- The answers, unsatisfyingly, depend on a number of factors, including which states and how long you were there, according to tax experts we spoke with.
- You can also deduct supplies that you buy like paper, printer ink, or supplies for your customers, and you can take the home office deduction.
- Working remotely gives employees the opportunity to work hundreds of miles from where they live — not to mention from the comfort of their own homes.
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. 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. All companies must withhold federal taxes from the salaries they pay to their employees. 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.
Home-based Remote Workers
Your tax liability could be triggered by the amount of time worked or income earned. States vary significantly in thresholds requiring taxation of nonresidents. If you work in a different state from where you live, you may have to file more than one state income tax return. As companies and their workers tackle telecommuting’s evolving tax implications, Klein advocates an awareness of all relevant state rules on remote work. Taxes for independent contractors depend on where they live and work. It is a good idea for them to keep careful records of income and expenses to calculate tax liability.
Guide to tax withholdings for stipends and fringe benefits
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. One way to ensure that you remain compliant in these states while benefiting your entire remote team is to offer a remote work employee stipend. This enables you to give your employees a taxable allowance for their remote work expenses, such as internet service, cell phone bills, and home office setup costs. You’ll also want to draft a company policy for remote work expense reimbursement in accordance with your local laws.
If you work at a larger company, for example, they can assign you to an office outside of convenience rule states so you can avoid being taxed by a state you aren’t in, Stanton said. The Tax Foundation’s Walczak said that by looking for short-term tax windfalls, convenience rule states might lose long-term tax gains by driving businesses elsewhere. To avoid this, it’s important to notify your job where you’re living so it can withhold tax from the correct state.
A person who lives and works remotely in Washington, for example, can perform work for a company that’s based in California without having to pay California state taxes. Working remotely gives employees the opportunity to work hundreds of miles from where they live — not to mention from the comfort of their own homes. Workers tended to live in the same state where their employers were located, meaning they only had to deal with one set of state taxes. Following these tips and strategies can help ensure you meet tax obligations as a digital nomad.
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. PeopleKeep offers health benefits administration software, not tax services. To avoid tax issues, should consult with a tax professional to learn more about your organization’s legal obligations. Catherine Stanton, past chair of the AICPA’s state and local tax committee, says she’s fielded an increasing number of questions about out-of-state remote situations from clients, both employees and employers. As with many things that happened during the pandemic, decisions about remote work often happened swiftly and without much planning. Nearly half didn’t know each state has different laws related to remote work.
What you need to know when your organization goes permanently remote
A number of other states, including New Jersey, Connecticut, and Iowa, have filed amicus briefs in the case. There’s also bipartisan interest at the federal level to stop the practice, including proposed legislation called the Multi-State Worker Tax Fairness Act of 2020 that would tax remote workers by residence only. Generally, your income tax is based on where you’re physically located when earning the income.
Yet the shift from the office building to the home office carries complicated tax consequences for firms and businesses that have yet to fully adapt to this new model of working. Pilot’s payroll and HR platform enables you to hire and pay contractors and employees worldwide. With some planning and research upfront, plus good record-keeping, you can stay compliant and avoid any surprise bills. 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. If you’re looking for a tax-free health benefit option, a health reimbursement arrangement (HRA) is a great choice. An HRA allows you to provide support for your entire team, regardless of their location.
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. Just like traditional employees, remote workers who work in the same state as their employer are generally required to pay that state’s individual income tax. Working remotely as a traditional employee for a company means the company can withhold from your paycheck. Employers deduct taxes for federal income tax, social security, and others. At the end of the year, they may need to pay additional taxes, or may receive a tax refund. In most countries, when a remote employee spends over 183 days in a tax year, this considers them as a tax resident.