So if your employer is based in one of these states and you worked remotely last year from another state with a similar rule, chances are fair you won’t be double taxed on the same income. At the very least you likely will have to file more than one state tax return for 2021, which will cost you more if you’re paying someone else to prepare your taxes. In this article, we’ll break down the key rules, challenges, best practices related to remote employee taxation, and why outsourcing to Remote Employee can help with possible challenges. If you’d like to learn more about remote work taxes or other topics to support, Becker has the courses you need to build your knowledge. With CPE courses for CPAs and IRS-approved CE for Enrolled Agents, you can feel confident that you’re meeting your requirements while gaining new skills and information to better serve your clients. Because of the strict abode requirements, tax practitioners should closely evaluate each client’s facts and circumstances because it is likely that many employees will not have a tax home abroad.
Tax implications for remote employees
The manual processes these teams relied on in the Before are no longer enough in the After. It’s critical that these teams have access to leading-edge technology that enables their company’s remote work policy seamlessly and with limited risk. Adopt software tools that track employee locations, determine applicable tax jurisdictions, and automate tax withholding and reporting processes. An employee working abroad will always have some connections to the foreign country, but their abode will remain in the US if their ties to the US are stronger. If you have a dedicated workspace in your home for exclusive work purposes, you can file for a home office deduction.
- As remote work arrangements can easily result in employees having to file returns in multiple states, we offer a quick overview of how tax obligations work for a US remote worker.
- Unless you live and work in a state with no income tax, you may get taxed twice on the same income.
- For example, if you live in California (which has an income tax) and work remotely for a company located in Texas (no income tax), you’d still owe state income tax to California on your income.
- More people today find professional freedom by accepting positions that let them work full-time remotely or have a hybrid schedule.
- Suppose you live in Pennsylvania but work remotely for a company headquartered in Delaware.
In this case, a person may be subject to double taxation — state income tax in the state reside, as well as where their employer is headquartered. Depending on how often you travel to the other state and the state’s tax laws, you may have to pay additional remote work taxes to that state as well as your state of residence. Rules are different for every state, so you may want to read up on state-specific tax laws, brackets, and other information. For example, Texas’s state constitution prohibits the government from instituting a state income tax. Remote workers residing in these states who do not perform work in other states only need to file federal tax returns.
This ensures you stay compliant with state and federal tax regulations, and free from the burden of navigating complex tax codes and filing requirements. For remote workers who live in one state but work for an employer based in another, reciprocal agreements can simplify the process of filing state taxes. These agreements are arrangements between certain states allowing residents to only pay income tax in their home state, even if they work across state lines. State taxes, on the other hand, vary significantly and can be complex for remote workers who work outside their employer’s state. State residency rules differ, with some states considering you a tax resident if you spend a certain number of days there or earn income within their jurisdiction. Remote workers may need to file non-resident state tax returns if they work in a different state than their employer, and, in some cases, even if they only occasionally work from a different location.
How to offer health insurance to multi-state remote workers
- Deciding to work from home is about more than wanting to work in your pajamas or eliminating your daily commute.
- This will help you to identify any expenses that you may have missed, and it will help you to stay on top of your tax situation.
- If you work across state lines, find out if your home state has a reciprocal agreement with the employer’s state.
- An EOR takes on the responsibility of payroll, tax withholding, and benefits management in the employee’s country of residence, ensuring adherence to local labor laws.
Here are the primary tax responsibilities employers should be aware of when hiring remote employees. The FEIE can significantly reduce taxable income for U.S. citizens working abroad; however, it does not eliminate the requirement to file a U.S. tax return. Federal vs. state taxation are usually complex, especially when you’re working across multiple jurisdictions.
They wanted to have a choice between maintaining flexibility and connecting in meaningful ways when it matters most. COVID-19 forced widespread office closures, and began a worldwide case study in how “fully remote” looks and feels. While some employees missed having that in-person connection, many employees discovered the benefits of newfound flexibility.
In this case, you and your cross-border worker could be subject to tax liabilities in both states. In these situations, the employee’s resident state may issue a tax credit for any income paid to how does remote work get taxed your organization’s state. Unlike other remote workers, these hybrid workers or in-office workers live in another state but work in the same state as your organization.
State Tax Obligations
Additionally, it can affect eligibility for employee benefits and protections. At the federal level, employers must withhold federal income tax, Social Security taxes, Federal Unemployment Tax (FUTA), and Medicare taxes for all W-2 employees, including remote workers. Under this legal requirement, you pay taxes in your state rather than the employee’s state. Additionally, double taxation risks, such as those for employees who commute across state lines, can still exist in some states.
How Remote Workers Can Leverage Tax Reciprocity Agreements
The tax implications of remote work can vary depending on the state you live in and where you’re performing the work. In this section, we’ll explore how state taxes can be affected by remote work and the differences in state tax laws that may apply to remote workers. The terms and conditions of the reciprocity agreements can change over time, so it’s important to stay up-to-date with your state’s tax laws. Consider taking professional help to avoid penalties and ensure accuracy in filing.
You would file a resident state income tax form in your home state and a non-resident tax return in the state where you work. As the taxpayer, you won’t have to pay the wage income tax in the non-resident state where your employment is. There are reciprocal agreements across 16 states and the District of Columbia. These reciprocity agreements only apply to wage income and not other income types. Because the laws can vary significantly from state to state, it is important to educate yourself early.
If you have some control over your work schedule and location, plan your remote workdays strategically, to minimize the number of your working days in states with high income taxes. Working remotely across state lines can introduce complexities when it comes to tax filing. Below, we share a detailed walk-through of all the key considerations that you must keep in mind for accurate tax filing.
Tax Obligations for Part-Year Residents
In this section, we’ll explore how to report remote work income on your federal tax return and provide some tips to help ensure compliance and maximize your savings. As a remote worker, you may be eligible for certain deductions and credits that are not available to traditional employees. However, it’s important to understand the differences in deductions and credits available to remote workers in order to maximize your savings and minimize your tax liability. In this section, we’ll explore some of the key differences in deductions and credits available to remote workers. Furthermore, remote work can also affect your federal taxes by affecting your eligibility for certain deductions and credits. For instance, remote workers may be able to claim deductions for remote work-related expenses such as home office expenses, internet and phone bills, and travel expenses.
When the employee’s state and employer’s state both have an income tax, the issues are more complex. Except as discussed below with respect to the convenience-of-the-employer rule, if an employee works 100% remote, they generally only file and pay taxes to their state of residence. It’s important to understand the tax laws and regulations of each state where you’re earning income, as well as the deductions and credits available to remote workers. Doola provides access to free consultations with tax professionals who specialize in remote work tax implications. They can answer your questions, address specific tax challenges, and offer personalized strategies for optimizing your tax situation.
If you’re an employer, failing to comply with these laws could lead to penalties. Consider offering a remote work stipend and reviewing state-specific labor regulations. In this article, I’ll clarify the tax rules for different types of remote workers and provide suggestions for services or other resources to make this process easier on your team. There are also state income taxes and state unemployment tax assessment (SUTA) taxes that can differ by remote work location.