In this case, you and your cross-border worker 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. When you have remote workers in different states, it can be difficult to understand your state tax requirements.
Tax Deductions and Credits for Working Moms
In general, they need to pay income taxes based on where they consider themselves as a tax resident. This is usually where they spend the most days in a year or where they maintain residential ties like a home or apartment. Digital nomads may end up paying double taxation when they pay taxes in multiple countries. The convenience rule can obligate employees to pay income tax to states they might now never step foot in, since it taxes income based on the location of the employer’s office. Typically, when this happens, the state where the person lives would award a tax credit to offset taxes in the state where that person works. A number of states have allowed people currently telecommuting to be taxed in the state where their job is located.
Crazy Things People Have Deducted
That could mean a higher standard of living and a lower income tax rate for the growing number of remote workers. But in some instances it could mean having to pay taxes for a place where they now neither live nor work — or even being taxed on the same income twice. Employees’ state of residence and the state where they work affect which state and local taxes they pay. Sometimes, if employees live in one state but have been working in another, they’ll receive a credit on their resident tax return to offset the nonresident state tax liability. But that’s not always the case, as different states have different laws.
Digital nomad
Trying to summarize international tax laws in a few paragraphs would be as hopeless as counting grains of sand on a beach. “At the end of the day, it’s a cost-benefit analysis. If somebody wants to work in Florida, there’s no income tax. But it can be a morass once you branch out to other states.” “This may not ensure total compliance, but it will avoid unexpected and unwelcome surprises and should allow most businesses to spot the areas with the most significant potential exposure.” “This way of working will only gain ground. I think a continued exodus of employees from big cities is inevitable.”
- At the end of the year, they may need to pay additional taxes, or may receive a tax refund.
- But moving data from United Van Lines last year suggests people are increasingly moving from states with high taxes to states with lower or no income taxes.
- Mark Klein, partner and chairman of the New York law firm Hodgson Russ, predicts continuing conundrums as companies in bigger, often more-expensive cities lose talent to other states.
- But in some instances it could mean having to pay taxes for a place where they now neither live nor work — or even being taxed on the same income twice.
By becoming a Vox Member, you directly strengthen our ability to deliver in-depth, independent reporting that drives meaningful change. One should also note that states without income tax often make up for it with higher sales, property, and other taxes. There are trade-offs between what those states buy with that tax (think schools and roads). Working remotely can be a boon or a bust for your taxes, depending on where you live. Renew now to continue enjoying unlimited articles how does remote work get taxed and exclusive resources.
Today, however, remote working has changed how we work, in ways that state and local taxing authorities across the United States have been slow to adapt to. “The amount of net worth that has moved out of the big cities has been staggering; COVID-19 has opened people’s eyes,” Klein said. “Even in high-level corporate professions, lawyers and bankers are now just as effective working remotely as they were in an office. Remote workers that receive Form W-2 from their employers don’t have self-employed status. Depending on where the employee lives and works, they may be subject to tax liabilities in multiple states.
While taxes for remote workers are usually not more complicated than those for traditional office workers, most educational resources on taxation cater to people in traditional environments. It is a key to establish a “tax home” to verify where to pay taxes and claim residence. For digital nomads, this is often where they maintain residence, keep belongings, or return to regularly. When they do not have a permanent home, they can choose a place where they spend most of their time. Independent contractors that move from one state to another while working remotely from the same employer must establish a domicile or obtain a permanent residence to avoid double taxation. Employers that hire out-of-state employees who predominantly work from home must report state taxes to the states where their remote employees live and not the state where their companies are registered.
