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The best way to find out how aggressively your state is pursuing tax revenue this year is to visit your state’s official website. Search for resources for taxpayers and businesses, and even consider contacting the correct state office directly for more information. On the flip side, you might find yourself living in a notoriously aggressive state. Although some states have offered some sort of “nexus relief” to avoid overtaxing businesses or individuals for the duration of the pandemic, many haven’t. Others, like Kentucky, have said they’ll consider the impact on taxpayers working from home on a case-by-case basis. This is hugely helpful for people who live near state lines and commute across the border for work.
Similar to your payroll arrangements, figuring out your tax liability comes down to your employee classification and where they’re located. International employees may actually lose money after their portion is exchanged for their local currency. It’s essential to understand what the IRS says about employee vs. contractor designation. If you don’t classify your team right, you could face severe tax fines and penalties come tax time.
Navigating remote work compliance
Complete a 1099 form for each contractor you’ve paid more than $600 during the year. This form tells Uncle Sam how much you paid team members in non-employee compensation. You’ll then be required to withhold taxes in the states where your employees work. If you’re already using a payroll provider for your in-house team, they’ll usually have an option for processing remote payments too. Remote employees are team members who work for your company outside of your office.
If you plan to work in a different state than where you reside, check into that state’s remote work taxes tax law to see if you will need to file personal income taxes with them. Taxation laws are never straightforward and, as of late, almost constantly changing. Although it wouldn’t be surprising if we see newer, more comprehensive laws for remote workers and teleworkers in the future, this year’s tax season may be a confusing one for many first-time telecommuters. And, if you haven’t (or don’t plan on) updated your address with the IRS, it could also mean consequences for your own taxes.
Double Taxation
The 2017 Tax Cuts and Jobs Act suspended the home office deduction through 2025 for employees who “receive a paycheck or a W-2 exclusively from an employer,” according to the IRS. If you receive a Federal W-2 form from your employer then it doesn’t matter if you work from home 100% of the time, 50% of the time or not at all – you can’t deduct work expenses to reduce your taxable income. But according to Obih, you can ask your employer to reimburse you for office expenses, co-working space fee or whatever else you have to pay for out of pocket.
- If you’re based in a traditional office, going remote could mean leaving the cubicle behind, for good.
- Reciprocity agreements are contracts between states that allow residents of one state to work in a neighboring state without having to file non-resident tax returns.
- Employers could inadvertently become liable for diverse state benefit programs or mandates, such as paid leave requirements, minimum wage, required disclosures, diverse wage statement requirements and so on.
- That said, the terms “teleworkers” and “telecommuters” are often used interchangeably.
- Most agree that it’s worth paying a few extra dollars for a service to do all the heavy lifting for them.
All such laws and others may apply immediately once an employee begins to work in a different state. Employers are responsible for knowing where their employees are and observing applicable laws. Among the action steps suggested later will be a process to determine the impact of an employee working in a state in which the employer might not already be present and familiar with the laws. There should also be a defined process by which employers identify state changes and apply appropriate coding changes so that the various systems recognize which state’s laws apply.
Remote work taxes outside the United States 🌏
While remote work taxes are overwhelming to understand, there are global HR solutions that streamline the employment and tax process overseas. Partnering with a company well-versed in international tax law allows you to travel abroad and stay compliant in multiple countries. No matter how long you travel, you should get to know your countries’ tax treaties. Tax treaties are agreements signed between two countries to address double taxation. The treaty will outline criteria that will let you determine which country you should be considered a tax resident of, and what tax exemptions or credits exist.
In 2020, employees are free from state taxes in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. The state constitution of Texas outright forbids its government to create a state income tax. Remote workers in these states who do not perform work in other states only have to file federal tax returns. Yes, if the remote employee/contractor is in the US and works for an employer based in a convenience rule state. If a worker is a US citizen working abroad, they could be taxed twice on income earned if they are a tax resident in a country that does not have a tax treaty with the US. That said, remote workers are often required to file taxes in their tax residence country (i.e., the country they spend the most time in).
S.H. Block Tax Services
Businesses, meanwhile, must contend with issues of payroll, benefits, and compliance. For example, European countries have signed treaties designed to prevent double taxation. It’s also possible that you may be entering into a working relationship with a digital nomad who works for your US company while they’re a tax resident in one country and a citizen of another. In this case, and especially where a visa is involved, they may be subject to multiple tax obligations or even enjoy tax incentives (e.g., Portugal’s NHR status award). Most people reside and are permanently domiciled in one place, but remote working has changed things.
