Blog

Payroll Brass Tax: Remote Work Triggers Multi-State Tax Risks

When an employee or independent contractor, who is a US citizen, works remotely in another country, the tax issues become complex because each country has its own tax code. Under the 183-day rule used by most countries, an employee is generally considered a tax resident if they physically reside in a country for at least 183 days during the year. To alleviate double taxation in these situations, states generally provide a credit to residents who pay taxes to other states. Consequently, if taxes are higher in the employer’s state, the employee pays more taxes than if they had worked exclusively in their state of residence. In addition to deductions, remote workers may also be eligible for certain credits.

• Talking to an accountant or tax professional can help ensure they meet all tax obligations properly when working remotely.
• Additionally, if you work with clients in multiple states or countries, you may trigger nexus in those jurisdictions, potentially complicating your tax situation even further.
• The state’s approach to taxing individuals who work outside its borders for a California-based company depends on a detailed examination of their personal and professional ties.
• With some insight into the rules and planning, you can make smart decisions to minimize your tax burden as a remote worker.

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. Stay on top of your obligations and you will be free to continue your nomadic lifestyle with peace of mind. Carefully track all income and business expenses to maximize deductions and ensure you pay what you owe.

• The convenience rule affects remote workers by potentially subjecting them to double taxation—both in their state of residence and the state where the employer is based.
• Staying proactive and informed is key to mastering the landscape of remote work taxes.
• But jobs that require in-person interaction typically aren’t well suited for telework.

What Is The Best Payment Method For Freelancers? (9 Options)

If you’re working remotely from multiple states, keep detailed records of how many days you worked in each one. Spending time in multiple states can further complicate your taxes and may require you to track the amount of time you spend in each state. Employers also said that tracking work hours and performance can be a challenge.

Correctly classifying remote workers as either employees or independent contractors is critical for tax and legal purposes. Employees typically have taxes withheld by their employer, while independent contractors are responsible for their own tax payments. Employers must be vigilant about the nature of how does remote work get taxed each worker’s role and responsibilities to determine the appropriate classification. 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.

Remote Work and Local City Taxes: Are You Affected?

According to WFH Research1, in August 2024, 12% of full-time employees were fully remote. Withholding the correct amount helps avoid surprises during tax season and potential penalties. Some states will tax you if you spend more than 183 days there, even if you’re not technically a resident. But it’s up to you to ensure those withholdings reflect your actual work location—especially if you’ve relocated or are working from a different state than your employer. There are reciprocal agreements across 16 states and the District of Columbia, according to Tax Foundation, a nonprofit research think tank.

What Are The Tax Benefits of Holding Cryptocurrency?

This can include home office expenses, travel expenses, and other work-related expenses. To claim these deductions, you’ll need to complete Form 8829, which is used to calculate the portion of your home expenses that are related to your work. Additionally, you can use Schedule C to report any business income and expenses. Some states may consider remote work to be performed in the state where the employer is based, while others may consider it to be performed in the state where the remote worker resides. This can have a significant impact on your state taxes, so it’s important to understand how your state views remote work and what the tax implications may be. Working remotely has become increasingly popular in recent years, but it also comes with its own set of tax implications.

Defining ‘abode’ when calculating remote work taxes

Remote workers must understand these distinctions to avoid double taxation and ensure compliance. 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, U.S. citizens working abroad may still pay income taxes and need to file tax returns, if earning above $100,000/year.

Tax Credits for Taxes Paid to Another State

Every state has different rules, but states generally require you to pay taxes and file a return if you’re a resident or a nonresident earning income in the state. That is unless the state has a reciprocity agreement with your home state or doesn’t levy an income tax. Furthermore, some states have “reciprocity agreements” in place, which means that residents of one state may not have to pay taxes on income earned in another state. This can be beneficial for remote workers who frequently work in a different state than where they reside. However, it’s important to note that these agreements can change, so it’s always best to check with the state tax department to make sure the agreement is still in place.

Most states assert the right to tax someone’s income on the basis of their physical presence generating that income within its borders, Cohen noted. By outsourcing, businesses can shift the tax burden to the service provider, reducing the need for extensive tax management and compliance. Remote work has become a permanent feature of the modern workplace, transforming how companies operate and employees thrive.

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. 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.

Visit the Super Lawyers directory to begin your search for an experienced tax attorney. Despite the complexities, HR software can be helpful in automatically computing and withholding the correct amounts, thereby minimizing the risk of errors or non-compliance. Organizations near state borders often hire employees from other states who commute to work across state lines. This is common in cities such as Portland, Chicago, El Paso, Washington D.C., and New York City. You may also need to file FBAR (Foreign Bank Account Report) and FATCA if your foreign accounts exceed certain thresholds.

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. 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.

And each one sets its own parameters for determining who must file a return and who owes income tax. Partner with tax advisors who specialize in multi-state and international taxation to ensure accurate filings and regulatory compliance across jurisdictions. An employee does not have to be in the country solely for business, but days for brief trips do not generally qualify.

The IRS doesn’t care about your location as long as you are working within the US. You can file federal income taxes based on your total salary, irrespective of your work location. Working remotely as a traditional employee for a company means the company can withhold from your paycheck. At the end of the year, they may need to pay additional taxes, or may receive a tax refund. For both remote employees and employers, staying informed about tax regulations and tracking work locations can help ensure compliance and avoid costly penalties.