A Guide To Remote Work Tax Implications
The flexibility of remote working allows employees to work from wherever they are in the world. This freedom does come with certain responsibilities, though, just as it does with most other advantages.
Taxation resources geared towards people in traditional environments cater to remote workers, even though remote workers' taxes are not generally more complicated than those for traditional office workers. Home-based (or nomadic) workers often have trouble getting access to the information they need to do their job effectively. There can be a number of challenges associated with working remotely, and it is important to familiarise yourself with working remote taxes. This guide will help you ensure you stay compliant no matter where you or your home office are located.
4 Common Remote Work Tax Implications
Those who telecommute have found it an excellent opportunity to travel or relocate to a rural area while continuing to work in their big-city jobs. In this new world of remote work, there are still a few things to consider - like remote work tax implications. While this might be a good thing for some workers, it hasn't changed everything for all.
It's important to understand what working remotely entails, and how it might affect your remote work taxes this year, so let's explore it further.
- The dual residency that results from working in multiple states is another thing that can happen. It happens naturally when you declare a move to the IRS. You will be taxed differently depending on where you lived during the calendar year.
- It is possible for an employer to develop a physical nexus with its employees when they work from home or an office in another state other than the employer's own. Employers may face problems if they have no nexus with the state, but now are subject to taxation there due to employee presence.
- Remote employees can't deduct insurance expenses, utilities, repairs, or depreciation for items in their home offices, even if they spend most of their time there.
- In spite of the fact that some states might fight tooth and nail to be able to tax your income, there have been other states who have found a better solution, and that is reciprocity agreements, which have become an alternative to taxation. A reciprocity agreement is a contract between two states that gives residents of one state the right to work in the neighboring state without needing to file non-resident tax returns when working in that state.
Doubling Up On Remote Work Taxes
There are two types of remote work taxes filed by workers in the United States: state and federal taxes. The federal government taxed U.S. workers according to their physical location rather than their employer's place of business. So, If you work remotely, where do you pay taxes?
State taxes when working remotely is more complicated. People who live and work remotely in Washington, for example, do not have to pay state taxes in California when they perform work for California-based companies. In some cases, remote workers may need to file a nonresident state tax return if they travel out of state and work there. Tax returns for nonresidents are not required unless the worker physically travels to another state and performs work there. There are some cases when workers may be protected from taxes in other states by reciprocity agreements. For non-residents, who work in-state for a certain amount of time or earn a certain amount, the income tax is triggered.
Consequently, if you work remotely for your employer and they are based in one of these states, the chances are reasonable that you won't suffer from double taxation on the same income if you worked remotely from another state with a similar rule last year.
If your employer is located in Connecticut, Delaware, Nebraska, New York and Pennsylvania, it is likely that you will be subjected to double taxation, as these five states have what is known as "convenience rules." This rule basically says that a state is allowed to tax the income you earn when working for an employer based in that state, even if you are doing your job remotely from another state, even if the employer is not physically located there. There is just one exception to this rule, and that is if your employer requires you to work out of state for its convenience, such as if you are assigned to another branch.
There are states where this tax liability can be accumulated without the worker ever stepping foot in the state. If some workers choose to work remotely, they will find that they will end up paying taxes in two states instead of only one (state of residence plus state in which the company is located), potentially doubling their tax burden.
Tax Saving Tips For Remote Workers
It is possible for remote workers both inside and outside of the United States to minimize their tax liabilities. The following suggestions may be helpful:
- Make sure you know whether you are an employee or a contractor. If you haven't clarified the nature of the relationship in writing, don't assume it. Ask your employer how you are classified and look up the local laws that distinguish contractors from employees. Whenever an employer discovers that a worker has been misclassified, they must act promptly to correct the situation.
- Make sure you know the tax laws in your area. In terms of income taxes, every country, state, region, and city has its own laws and requirements. Research local tax laws before moving to a new area. Many employees find that working with a tax professional is less expensive and easier than navigating uncharted waters on their own. Staying compliant requires third-party assistance from a PEO (Professional Employer Organisation) or an EOR (Employer-of-Record) for employers with international employees and contractors.
- Hire yourself through an EOR if your employer is willing to do so. Employees and contractors working outside the U.S. may not receive the support they need.
- Taxpayers who work remotely from Wyoming, where there is no state income tax, can avoid paying income taxes if they live and work in Washington, D.C., where the maximum individual income tax rate is 10.70%.
Tax Deductions
Although the effects of the pandemic on remote work could not have been anticipated, the Tax Cut and Jobs Act of 2017 wound up hurting many employees who were tasked with setting up a home office at short notice.
Previously, employees could take advantage of miscellaneous itemized deductions, such as desks and monitors for work purposes, before this act. It is still possible to take advantage of these deductions for remote contract workers (or independent contractors) and remote self-employed individuals.