A number of states have allowed people currently telecommuting to be taxed in the state where their job is located. New Hampshire, where many people who work for firms in Massachusetts currently live and work, filed suit in the Supreme Court over Massachusetts continuing to collect income tax on people working remotely in New Hampshire, which doesn’t how are remote jobs taxed collect income tax. 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.
In this case, you and your employee could be subject to tax liabilities in both states. Reciprocal agreements—or a compromise between states that allows nonresident workers to request tax exemption from the other state—exist in some places to prevent double taxation, but only some states have one. In these situations, the employee’s resident state may issue a tax credit for any income paid to your organization’s state. Unlike other remote workers, these commuter employees live in another state but work in the same state as your organization.
Detailed Discussion of Remote Work State Taxation
Given that remote work taxes can get tricky, there are some common pitfalls you can avoid. Below are some tips to keep in mind to ensure that you remain compliant with your taxes. Many digital nomads take advantage of special tax-free exemptions, as there are some countries where they can pay no (or reduced) taxes. For example, Costa Rica offers a digital nomad visa that exempts you from many tax requirements.
As with most state tax issues and policies, however, states adopt a patchwork of laws that include numerous exceptions to the general residency/source rules, some of which are discussed below. Whether remote workers pay income tax to the state where they work temporarily depends on the duration of their stay. Different states have different guidelines on the length of time that warrants an employee to file a non-resident tax return. Remote workers in these scenarios often look up their local state laws to determine the time required to file in their temporary state.
Q: Do I need to file state and local income taxes if I work remotely?
If you live in California and work remotely for a company in Nevada, you won’t have to pay Nevada state income tax on your earnings. Remote work is an excellent way to get more time with your family or avoid long commutes. For digital nomads who work overseas, you can also use remote work as an opportunity to travel and expand your horizons. You can have fantastic experiences as a remote worker; just know your taxes or have your employer sort it out for you. You can clear up a lot of the potential confusion by discussing things with your employer’s human resources department (or someone knowledgeable on tax laws). You don’t have to know everything about taxes; you only need to know your unique situation.
Both remote work and business travel, however, give rise to important and complex tax policy considerations for state lawmakers. For instance, as discussed throughout this White Paper, policymakers might consider (and balance) the burdens placed on employers, employees, and revenue administration, while weighing fiscal issues and traditional tax equities. As with many things that happened during the pandemic, decisions about remote work often happened swiftly and without much planning. “If you’re https://remotemode.net/ not doing anything to avail yourself of that states’ government services or resources, not only does it seem unfair but it creates conflicts with every other state’s income tax code,” Jared Walczak, vice president of state projects at Tax Foundation, told Recode. There are also local taxes that you may have to pay or withhold from your employees’ paychecks, depending on their state of residence. Suppose you become liable for collecting and remitting sales tax for states due to remote work.
Understand the benefits of foreign tax credits, tax treaties, or exclusions available to remote workers.
Payroll is often the largest single cost component when sourcing under this method, and service businesses are more likely to have remote workers than traditional sellers of tangible personal property. Therefore, in these situations, a shift in employee work locations can directly affect receipts factor sourcing for apportionment. Once again, this highlights the practical need to accurately capture the location from which compensation is earned. Workers typically pay income tax in any state where they reside, but they might also have income tax obligations in the state where their employer’s office is located.
Even if you prefer using software and preparing your taxes yourself, CPA and Tax Strategist Chika Obih recommends hiring a tax professional for at least the first year you work in a state different from where you live. That way you’ll at least have a basic understanding of your tax situation that you can follow in the future. But the freedom that comes with remote work can also cause confusion when it comes to your taxes. Depending on where you’re logging in to work, you may have to navigate tax codes from different states or cities. And while working from home can save your employer from office expenses, the same can’t always be said for you and your tax bill. American citizens working abroad have to pay taxes to whatever region they live in; remember, in most scenarios, you have to pay taxes where you do the work.
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For example, New York did not consider working from home due to the COVID-19 pandemic to be an exception to the convenience of the employer rule. As with the tax compliance issues described above, employers and government agencies face difficult process and compliance issues when employees are authorized to work remotely. Employers are finding that offering remote work options are often necessary to attract and compete for in-demand workers. But in so doing, employers may be required to have in place nondiscriminatory processes for employees to request remote work, including processes for notification of change in work location, and government agencies are required to ensure compliance with the laws establishing such requirements. Moreover, employees may be subject to laws and regulations (such as minimum wage, vacation pay, noncompete agreements, etc.) at their remote work location that differ from their prior office work location. And, again, government agencies will be required to monitor compliance with such laws and regulations by the employers employing these remote workers.
