As a remote worker, you must know all the tax implications that can affect your work. These may include income, self-employment, and state taxes.
There are some credits and incentives that can be earned from your business. Employers should consider working with Experian Employer Services to track these programs and understand the potential impact of their decisions.
Taxes for Remote Workers
Whether you’re looking to make remote working permanent or hire remote workers, you must understand how taxes work for these employees. You’ll also need to know what tax implications remote workers may incur abroad.
One of the biggest challenges for many companies is navigating the complicated remote work tax laws in different states or issues like tax implications of remote workers. Fortunately, there are ways to minimize the impact of these tax obligations on your business.
For example, you can offer a stipend to your remote team that will help cover their out-of-state travel costs (e.g., airplane tickets and hotel accommodations). This can reduce the total amount of state income tax your employees pay on their wages.
However, other factors can also impact the tax burden for your remotely employed workers. For instance, the Physical Presence Test is essential for workers who travel across the country regularly.
This test determines whether you create a “nexus” with the state you’re working in and owe taxes in that state. The time a remote worker spends in a particular state before they owe tax varies from state to state.
The pandemic has caused many Americans to move out of crowded cities to areas with more space or to be closer to family and friends. These changes have led to more remote workers than ever before, which poses new challenges for companies and states. Despite these challenges, working from home across state lines will likely remain a common practice.
Income Tax
Working remotely can save your company money on office expenses, but it can also add a few extra layers to your tax bill. In addition to income taxes, you may also have to pay state and local taxes depending on where your work takes you.
You might wonder how to maximize your tax savings as a remote worker. One way to do this is by deducting your home office expenses from your taxable income.
Currently, W-2 employees can’t take the deduction for these costs, but self-employed individuals and independent contractors can do so. However, you need to know the rules and how they apply to you.
Another consideration is where you file your tax returns. Generally, you’ll point them to the state where you live and are considered a resident.
But that only sometimes holds for remote workers. Some states have a so-called “convenience rule” that will require you to file taxes in your employer’s condition even if you don’t live there or at least weren’t working there for more than 183 days.
This can lead to what’s known as double taxation.
This can be particularly tricky for digital nomads traveling between states, like during the COVID-19 pandemic. In that situation, you could be liable for income tax in both states under the convenience rule, according to Tax Foundation.
Self-Employment Tax
If you’re self-employed or an independent contractor, you must pay taxes on your earnings from your work. This includes the Social Security and Medicare taxes.
If your tax situation is complicated, you should talk with a CPA about your options. They can help you minimize your tax liability and maximize your savings as a remote worker.
Often, the best way to minimize your self-employment tax is to deduct some of your business expenses from your income. This includes rent or mortgage payments, utilities, and property taxes. You can also remove office supplies and equipment used for your business.
You can even deduct half of your Social Security and Medicare taxes if you’re self-employed. This is called the employer-equivalent deduction and can reduce your overall income tax bill.
However, if you live and work in multiple states, you could face potential double-taxation issues. This is because state laws differ in each one, and there’s no rule of thumb for what’s allowed.
This could cause your overall tax bill to go up if you’re not careful, so it’s essential to understand the rules in each state. You can avoid this by ensuring you are compliant in every state you work in and drafting a policy for your remote team to ensure they get the proper pay for their efforts without worrying about being taxed twice.
State Taxes
Working remotely can be an exciting and fulfilling way to work. But it can also present some tax challenges. In particular, remote workers who live in different states need to pay income taxes in their home state and the state where they work.
For this reason, it is essential to familiarize yourself with your state’s rules and where your employer is based. There are several ways to avoid this tax mess.
First, if you’re working from a home office and it isn’t your principal place of business (as opposed to a home or rental property), your employer may not withhold state income tax. If they do, you should claim a credit for the amount of state income tax they withhold so that your income isn’t double taxed.
Alternatively, you could also be subject to sales tax nexus in your home state, depending on your company’s activity. In this situation, you’ll need to register for a sales tax permit and file sales tax returns on the schedule that applies to your business.
Finally, you should check with your employer’s human resources department to determine whether they’re aware of any changes in their state tax policy relating to remote workers. Several states apply a “convenience test” to determine how wage income should be taxed for remote employees. For instance, conditions such as Arkansas, Delaware, Nebraska, and New York will tax a remote worker’s income based on the convenience of their employer rather than their physical presence in the state.
